Emerging Markets Debt : Emerging Markets Have Become Diverging Markets | Capital Group


Emerging Markets Debt

INVESTMENT INSIGHTS  |  September 2015

A Period of Adjustment Is Underway

Weaker Currencies, Higher Yields Have Helped Create Attractive Valuations

Source: J.P. Morgan 

Through 7/31/15. Month-end yields for U.S. dollar–denominated bonds and local currency bonds are drawn from the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified and J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified, respectively. EM exchange rate (rebased to 100 on 6/30/10) implied by latter bond index.

Six years ago, the global economy was emerging from recession in the wake of the financial crisis. At that time, developing countries such as China, India and Brazil were the engines of global growth, while emerging markets debt was a source of strong investment returns for bond investors.

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INVESTMENT INSIGHTS  |  September 2015

China’s Transition Reverberates Across the Globe

China’s Move to More Sustainable Growth Likely to Affect Demand for Commodities Economic and Credit Growth in China (Year on Year) and China’s Proportion of Global Demand for a Selection of Commodities

Commodity demand data calculated by Barclays Research using data from U.S. Department of Agriculture, BP, Wood Mackenzie, CRU Group and National Bureau of Statistics of China.

Sources: Barclays Research, Capital Group, CEIC Data. 

Slowing growth in China also poses a near-term challenge to other emerging markets. However, it is important to keep in mind that the reforms being spearheaded by President Xi Jinping are aimed at improving efficiency and pursuing a more sustainable (albeit slower) pace of growth.

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INVESTMENT INSIGHTS  |  September 2015

A Mix of Headwinds and Tailwinds

Lower Commodities, Demographics May Be Tailwinds for India, Headwinds for Russia

West Texas Intermediate crude oil price, London Metals Exchange copper price and Thomson Reuters/Jefferies CRB Iron Ore 62% FE CFR China Cash price. Month-end price data (rebased to 100 starting December 31, 2013) through July 31, 2015. Population data and transition characterization from Moody’s Investors Service, using United Nations data.

Sources: FactSet, Moody’s Investors Service.

Coinciding with the weakness in industrial commodity prices, energy prices have also fallen significantly since the middle of 2014. This has been driven by the growth in supply from new sources in North America as well as some impact from reduced global demand.

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INVESTMENT INSIGHTS  |  September 2015

Varied Fundamentals and Risks Spell Divergence

Bright Spots and Some Challenging Near-Term Outlooks Among Major Credits 2015 Consensus Forecasts for a Selection of Larger EM Economies (as of June 15, 2015)

For current accounts, negative and positive figures indicate deficits and surpluses, respectively. For budgets, negative figures indicate government budget deficits.

Sources: Bloomberg, Capital Group, Datastream

Currently, there is substantial variation in fundamentals among individual countries. For example, there is deflation in Eastern Europe, but inflation in Latin America.

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INVESTMENT INSIGHTS  |  September 2015

Near-Term Challenges, Longer Term Optimism

Emerging Economies Are Diverging Economic Growth (2015 Gross Domestic Product and Percentage Point Change Since 2013)

Source: International Monetary Fund. 2015 figures are full-year projections.

Clearly, some emerging economies face major near-term challenges. Still, it’s also fair to say that — compared to the past — emerging economies are broadly in better shape.

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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

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