null Evaluating Our EMD Expectations
Manager Insights

Evaluating Our EMD Expectations

Manager Insights Article Income Fixed Income
August 2020
Evaluating Our EMD Expectations

In our May publication “Emerging Opportunities in EMD,” we highlighted a tactical opportunity to invest in emerging market debt (EMD). In this note we described the JPMorgan EMBI Global Diversified (EMBIGD) Index’s long-term history of quick rebounds after drawdowns. We indicated our expectation that the index would recover from the 14% total return loss experienced in March; the second worst shock in the last 20 years. 

Fast Forward

In line with our predictions and these historical patterns, the EMBIGD recovered March’s losses very quickly and produced extraordinary returns over recent months. As of August 12, 2020, the index printed a new all- time high, recovering 18% from its lowest point. Additionally, spreads tightened over 200 basis points following the highs seen in March. 

JPMorgan EMBI Global Diversified 
Value of $100 at Inception

Source: JPMorgan data accessed via Bloomberg. Mellon calculations. As of August 12, 2020.

JPMorgan EMBI Global Diversified OAS

Source: JPMorgan data accessed via Bloomberg. Mellon calculations. As of August 12, 2020.  

Looking Ahead

While the speed of the recovery has been impressive and argues for moderation in returns over the coming months, we continue to see value in the asset class. Spreads appear attractive compared to those in competing asset classes, such as US and European corporate bonds in both the investment grade and high yield segments. 

We also expect cyclical/fundamental drivers to support the asset class for the remainder of this year. While there is no shortage of potential threats on the horizon (COVID-19, US elections, geopolitical uncertainty), we believe that the current macro environment will continue to enable a constructive global backdrop for the asset class. We expect low global rates for the foreseeable future, anchoring all types of fixed income securities. We also believe that investor risk appetite should increase as global activity rebounds and countries progressively continue to reopen along with various sectors of the economy. Moreover, the successful development of a COVID-19 vaccine would further increase global activity. 
 

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