Capital Ideas

Investment Insights from Capital Group

Emerging Markets
Emerging markets debt likely to hold ground, despite volatility
Rob Neithart
Fixed Income Portfolio Manager

Bond markets in developing economies have been challenged of late, but investors shouldn’t fear widespread, systemic risk, says portfolio manager Rob Neithart. He offers reasons for the recent volatility and names areas of opportunity. 

View transcript

Apu Sikri: Let’s go to emerging markets, Rob. We've seen a selloff in many emerging markets. How high is the risk of it becoming systemic and more widespread?

Rob Neithart: I judge the risk to be rather low, at this point, of a systemic, kind of touches-all-countries, significant movement wider in emerging markets risk premiums. But there's a key reason. I don't feel that the global economy is really at risk of another recession, or even a recession scare. If you just go back as recently as late 2015, at that time there was significant stress in many emerging markets around the world. Interest rate spreads had widened significantly, currencies depreciated dramatically and corporate risk premiums were widening.

That was a period where the world was fearful that recession was looming. China was significantly depressed. Many forecasters were calling for a recession in the United States. And it was not unreasonable. I mean, virtually every indicator of activity was pointing south. They were all deteriorating rapidly.

And in the end, we didn't have a recession, because China stimulated and other central banks increased their easing and support of the market. But I think also people mistook a normal kind of cyclical adjustment in the industrial sector for something that was going to spin out of control. Once the industrial sector cleared out the inventories, everything picked right up again. And we had a strong phase, for both markets and the global economy.

Today, I don't see evidence that the cycle is at risk. The Chinese have taken steps to significantly ease. We have a lot of stimulus coming through the United States on the fiscal side. The Japanese and the Europeans are in no hurry to tighten, because I don't think that they want to be facing the risk of a downturn. Nor do they have any reason to, because inflation remains very low.

That's the kind of environment that would, I think, push risk premiums in emerging markets significantly wider, because it is a cyclically sensitive, growth-dependent asset class. What we've seen, though, are a number of situations that are simultaneous — coincidental with each other — of individual country stress. We did have a period of worries about China — we still do, it's not over — but those concerns have become a little more relaxed. Anxiety about the Fed maybe tightening aggressively. And then you had problem countries for their own domestic reasons — the likes of Turkey and Argentina — really developing difficulties.

Those situations have started to fix themselves normally, meaning the market pressures have caused an adjustment to take place. It’s textbook adjustment. I mean, Turkey's economy has moved into recession. Their current account and external balances have swung dramatically back into surplus. The supply and demand in the system for Turkish lira has stabilized. And they've raised interest rates. Argentina is following the same path. And I think they're likely to continue on that path.

Apu Sikri: It's interesting. The emerging markets adjust quicker through market mechanisms, you would argue, than even ... We just talked about Europe, so —

Rob Neithart: Yeah, they have fewer resources to draw from, and they have fewer degrees of freedom. So, the ECB can do a lot more than the Bank of Turkey or Argentina's central bank. They're more exposed and, therefore, when the pressure is on, they have to accommodate.

So, the major concerns are mostly geopolitical. Is leadership in Turkey going to stick to the program or are they going to just say, “Forget it. We're just not going to pay our debts” and stiff all the creditors. Same thing in Argentina. Are they going to stick with the program? They have support from external lenders. The IMF is in there.

Apu Sikri: When you look at the local markets, where are you seeing opportunity and where do you see further downside risk?

Rob Neithart: So, I find value in places today like Mexico, believe it or not Turkey, as well as Argentina. They need to stay on the path that they're on, but the risk premiums are high enough to get me interested. In addition, I think there are some markets in Asia. Yields are lower, but I do find attractive opportunities in local currency Indian bonds, local currency bonds in Thailand, for example. Russia is a completely different situation. If I could take the risk of sanctions away — which you can't do it but if you could — Russian domestic debt instruments are phenomenally attractive. Russia is almost entirely self-sufficient on financing. It actually doesn't even need to go to the market to finance itself. So, I need to judge the risk that there are sanctions and how long or severe those sanctions might be.

But that's a basic reality of emerging markets investing — volatile economies, geopolitical risks, unpredictable politics — but very high risk premiums that can produce excellent returns over long periods of time.


Rob Neithart is a fixed income portfolio manager who focuses on global multi-currency fixed income, emerging market debt and global high income portfolios. He holds a bachelor's in economics from Occidental College and is a CFA charterholder.

Our latest insights

Related Insights 

Hear from the investment team.

Don't miss out

Get the Capital Ideas newsletter in your inbox each week


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. Similar information about collective investment trusts can be obtained from Capital Group or participants' plan provider or employer.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Use of this website is intended for U.S. residents only.

American Funds Distributors, Inc., member FINRA.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.