As the year has progressed, however, it now feels like investors are returning to more of a “wait and see” mode, as it feels like the asset class has become a prisoner of what’s happening in the US.
On the technical side, the amount of outstanding EM bonds has continued to shrink, as issuers have been finding it very expensive to come to market. In 2022, net issuance was -$230bn, and year to date it’s -$66bn. Last year, there were concerns that a lack of access to international markets from issuers could result in a big spike in defaults, but in reality, issuers have been able to successfully tap into local markets instead. This means we’re seeing deeper markets, and there’s not a mismatch between assets and liabilities.
As we move forward, we think uncertainty is likely to continue, with investors remaining in this “wait and see” mode while they wait for the US Federal Reserve’s (Fed) next moves. However, if you look at where spreads are, we take the view that investors are getting paid to wait, and as duration can be easily managed too, right now it’s mostly about avoiding the defaults.
EM vs DM Consumer Price Index (annual YOY %)
Source: Bloomberg, EM CPI vs DM CPI (annual YOY %), 1999 to 2023
In terms of a possible recession, we don’t know if it’s going to be a deep recession, or a mild one. However, as investors are currently nervous about investing in what they perceive to be “riskier” asset classes, such as emerging market debt, it’s allowed us to go up the credit ladder to access investment grade credits with strong fundamentals at attractive spreads, with these companies being more likely to successfully navigate a recession.
In terms of recent adjustments, we have increased our Asia exposure, mostly outside of China, with a focus on Thailand, Singapore, Hong Kong and Macau. Given Asia represents 40% of the benchmark (primarily investment grade), the Asia universe tends to be an underweight for many investors. To increase our Asia exposure, we have reduced our Middle East allocation. The Middle East performed well last year given strong oil prices and good liquidity, with locals buying many bonds; however, valuations have started to look expensive, so we have taken some profits, especially in the oil and gas sector. We have been overweight Latin America for some time, and valuations remain attractive there, though we have been shifting our exposure within the region, given the evolving political backdrop.
The value of active minds: independent thinking
Get in touch
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Fixed Income investing is exposed to credit and default risk where the creditworthiness of the issuing entity may fall due to market conditions. In addition, bonds carry interest rate risk where the value of the bonds can change due to a change in interest rates. High yield rated bonds have a higher risk of default compared with investment grade bonds. Emerging markets have a high risk of volatility due to political and economic changes. Market conditions can vary and result in investments becoming illiquid when it becomes hard to sell at a desired time and price.
This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.