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The Push And Pull Toward Emerging Markets



  • In the midst of the unprecedented COVID shock, many EM central banks quickly shifted to extraordinarily easy monetary policy.
  • For speculative-grade EM sovereign bonds, the worries are more structural in nature.
  • There are plenty of global "push" factors to encourage investors to move out of the U.S. dollar, not the least of which are an eroding trade balance for the U.S. and the Fed's shift to average-inflation targeting.

By Alberto Boquin

This article, the second in a two-part series, discusses some of the factors holding emerging markets back, what may cause them to shift, and where we see potential opportunities.

In the previous post, my colleague Carol Lye highlighted two key tailwinds supportive of emerging markets (EM) in 2021: an easy U.S. Federal Reserve (Fed) and robust Chinese growth. Add to that buoyant commodity prices, rapid vaccination rates in the developed world, and a global-almost frenzied-search for yield. All these factors are obvious to anyone who reads the financial news. And yet, local-currency EM fixed income has struggled in 2021. What is holding it back? We would argue that there are two pieces still missing from the puzzle. One is that investment-grade EM sovereigns do not offer enough yield yet. The second is that speculative-grade EM has looming fiscal concerns. There are signs that both factors may be changing for the better.

Among Investment Grade, Chile and Poland Stand Out

Let us start with investment-grade EM. In the midst of the unprecedented COVID shock, many EM central banks quickly shifted to extraordinarily easy monetary policy. On some measures, monetary policy is even easier than it was following the global financial crisis (GFC) of 2008 (see Chart 1). So far, this recovery has been much faster and with less structural overhangs than the one following the GFC. However, policy rates that made sense in the summer of 2020 may no longer make sense as the world starts getting vaccinated and emerges from a year-long quarantine. While it is true that higher-quality EMs never offered particularly high real rates for foreign investors, the flows of capital go both ways. There is widespread evidence of local EM investors "dollarizing" their savings and prepaying U.S. dollar liabilities amid low domestic rates. For the moment, central banks worldwide have reaffirmed their intent to remain lower for longer, but money markets have started to

This article was written by

We believe in the power of value investing, looking beyond short-term, conventional thinking to pursue long-term value. Since 1986, our global experience has generated investment insights and a range of differentiated fixed income, equity, and alternative solutions. As a specialist investment manager of Franklin Resources, Inc., Brandywine Global offers the advantages of an investment boutique backed by the resources and infrastructure of one of the world's leading asset managers. With headquarters in Philadelphia and offices in London and Singapore, we are committed to bringing value to all relationships.

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Comments (1)

Ben Gee profile picture
Get into EM before everybody does.
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