Emerging market local debt | Monthly macro insights

Emerging market local debt | Monthly macro insights

Each month, our experts share their views on the emerging market (EM) local debt asset class. Read their outlook and discover which markets they believe are presenting the most attractive opportunities.

Invesco’s Global Debt Team offers international fixed income expertise incorporating a broad, global lens. The team is based out of New York and is part of Invesco’s global Fixed Income platform, known as IFI

Comprising 11 investment professionals, they manage USD 6bn across their platform, including USD 3bn in emerging market local debt. The team has a long, successful history of investing in international fixed income, dating back to the mid-1990s, enabling them to interpret market events through a multi-decade context.

Taking a collaborative macro and country level approach in addition to a fully integrated comprehensive environmental, social and governance (ESG) framework, has been the key drivers to the team’s success for over a decade.

EM central banks stay on rate cutting path, with eyes on the Federal Reserve (the Fed)

In this edition

  • The EM local debt asset class is in good shape, in our view, thanks to solid macro fundamentals, attractive valuations and favourable interest rate differentials versus developed markets.
  • EM central banks have continued to lower interest rates but are carefully watching the Fed moves for their future policy direction.
  • After South Africa’s recent election, we expect general macroeconomic stability and see potential opportunities in South African assets.
  • Sizeable capital inflows continue to help improve Egypt’s financing conditions. Adherence to a recently expanded IMF programme should help stabilise the country’s economy and promote external confidence and investment flows.
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Emerging market opportunities with Invesco

The insights brought to you in this report inform the management of our Invesco Emerging Market Local Debt Fund. Learn more about the strategy and the management team below. 

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Emerging market debt is fixed income debt issued by developing countries and corporations within those nations. It’s comprised of both local-denominated and hard currency-issued securities.

Local currency bonds are issued by sovereign entities or corporates in their local foreign currency. The return drivers come typically from local yields, capital appreciation (changes in yield curve or credit standing) and foreign exchange (FX). On the other hand, EM hard currency assets are issued in USD, Euros, JPY, CHF or other stronger developed market currencies. Its return drivers come from external yield moves in the base currency (e.g. US Treasuries) and developing market credit spread changes.

Given attractive nominal yields in EM, an easing bias by most EM central banks and a benign macroeconomic backdrop support income generation from both interest rates and currency carry. The normalisation of the term structures of rates will likely also be meaningful market drivers this year. We think EM rates could deliver beta returns higher than their current yield levels, with shorter-dated bonds delivering significantly higher returns relative to their yield levels.

Three key differentiators that have led to our success in the asset class are our macroeconomic risk framework, focus on downside risk mitigation and our fully integrated approach to ESG in the investment process. We seek to manage downside risk by maintaining portfolio volatility at or below that of the benchmark and only increasing tracking error to the downside. This asymmetric approach allows us to help mitigate downside risk relative to our peers. Additionally, by integrating ESG factors in our investment approach, we assess emerging market economies in a holistic manner that we believe will deliver improved returns over the long-term.

Investment risks

  • For complete information on risks, refer to the legal documents.

    The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.

Important information

  • Views and opinions are based on current market conditions and are subject to change. 

    Data as at 31 May 2024, unless otherwise stated.

    This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.