Q1 2022 recap
- Emerging markets debt indices sold off notably across the board during the first quarter as markets sought to digest the Russian invasion of Ukraine, further stress in the China property market, and the pricing in of an increasingly hawkish U.S. Federal Reserve (the “Fed”). However, the differentiation within markets was extremely broad as investors sought to digest these events. The situation in Ukraine, of course, drew the attention of the entire world and assets in the region were the clear underperformers. Russian, Belarussian, and Ukrainian assets were generally the hardest hit among index constituents with Russian sovereign bonds being removed from the indices as of the end of the quarter. Most other Eastern European markets were dragged down, as well, given concerns over both the economic impact as well as increased geopolitical risk. On the other end of the spectrum, assets in Latin America and South Africa were generally stronger during the period as investors tended to perceive countries with notable commodity exports, limited trade with Russia, and physically distant from the conflict as being attractive. Asian markets were more mixed, but generally sold off as markets digested further contagion across the Chinese property sector as well as the impact of higher commodity prices and a more hawkish Fed.
- As it was around much of the world, inflationary pressures remain elevated in most EM countries with the commodity-price channel effects of the Russia/Ukraine conflict. That said, many EM central banks have continued reacting with orthodox monetary policy.
- The local-currency segment of the EMD space was the best performing one as, despite the weakness in Eastern Europe, currencies were actually stronger versus the U.S. dollar in aggregate over the period led by Latin America. However, rising interest rates – similar to developed markets – overwhelmed currency strength and created notable, negative total returns. The corporate segment was next also having experienced notably negative performance at the index level. Russia/Ukraine and China property challenges had a large impact on spreads while the sell-off in U.S. Treasuries further impeded returns. The sovereign hard currency space was the worst performing segment; largely for the same reasons for the sell-off in corporates.
- The asset class experienced notable outflows during the period with approximately -$14.1 billion net during the quarter. The split between hard currency and local currency was notable with -$11.9B out of hard currency and only -$2.2B out of local.
- The new issuance market was more quiet during the period given macro stresses and the higher all-in yields issuers have to pay today relative to 3 months ago. However, market access appears open for countries across the credit quality spectrum for those needing funding.