Emerging Markets 2021: Key Themes for EMBI Investors in a Post Pandemic World

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Emerging Markets 2021: Key Themes for EMBI Investors in a Post Pandemic World

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Todd Howard Thomas Smith Nalini Cundapen, Jose del Rosal, David Richter, Chris Celio, Doug Renwick, David Heslam, Felipe Perigo, Christopher Magnus, Michael De Fazio
MAR 26, 2021


The year of 2020 was unprecedented in countless ways, from the continuing health crisis and the commensurate growth shocks to an equally shocking amount of global policy support in the form of monetary and fiscal stimulus. The growth and policy hangover from 2020 will be felt for years to come with its lingering effects creating unique challenges in what will, hopefully, soon become a post pandemic world.


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Emerging Market Debt

Since the inception of the EMBI in 1994, EM investors have experienced numerous market-moving events, some positive and others negative, caused by both global and country-specific developments. Some of the most memorable highlights include the late 90s currency crises, the .com bubble and 9/11 attacks in 2000-1, the multi-decade rise of China and the commodity boom, the Great Financial Crisis of 2008/9, the European debt crisis of 2010-12, the taper tantrum and commodity bust of 2013-16, the rise of populism and trade wars in 2016-19 and most recently a global pandemic. Along the way, some EM countries have defaulted and restructured, while many others fortified their monetary and fiscal credibility to enable countercyclical stimulus when they needed it the most.

Despite these volatile events, the sovereign bond universe has grown in size and scale and we believe continues to reward investors as evidenced through the EMBI’s comparably attractive returns against major fixed income indices since 2003 (see figure 1).

Our collective experience as a team gained throughout the years, over a wide range of market cycles, is the basis for seeing the current environment as challenging yet ripe with opportunities. In the wake of the pandemic, we acknowledge the challenges many EM sovereigns will face, which will undoubtedly create stress points for policy makers, global multilateral institutions and investors. This emerging market debt discussion will consider these challenges and feature input from our global team, each of whom will share their perspective on themes that we believe will be most relevant to EMBI investors in a post pandemic world:

  • EMBI Index Changes: Greater resources are required to efficiently navigate the significant changes in the EMBI over the last decade including more issuers, higher dispersion of credit quality and greater yield sensitivity. 
  • Official financing in a Post Pandemic World: Official creditors have always been and will continue to be key supporters of developing countries. During the pandemic, massive support was provided with little conditionality. Going forward we expect conditionality to increase.
  • China’s prominent role for Emerging countries: China’s significance within the global economy and its growing commercial and financial linkages to many emerging economies will have a direct impact on growth and debt dynamics for years to come.
  • After Covid, ESG considerations matter more than ever: In a world with higher debt burdens and lower financial flexibility, it has become even more critical to differentiate based on ESG factors.
  • Opportunities in EUR-denominated EM issuance: EUR-denominated bonds represent a rising share of EM hard-currency sovereign debt, and investors with flexibility can periodically find good value, currency hedged or unhedged.
  • Sovereign Ratings Outlook: With many sovereigns on negative outlook due to rising debt levels we expect the agencies to be more patient as the recovery is taking hold and official institutions remain willing to provide liquidity support.
  • The Future of Sovereign Restructuring: Higher debt is a legacy of the pandemic and will likely beget more complicated sovereign defaults and restructurings over the coming decade. We apply recent lessons learned from Argentina and Ecuador.
  • Trading themes in Emerging Market Debt, a Trader’s perspective: Trading volumes have steadily increased, but perhaps not as fast as the market has grown; however, there are pockets of better improved liquidity. We highlight the most recent trends impacting our market, such as electronic trading, ETFs, crossover investors, longer-dated tenors and sustainable bonds.

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Emerging Market Debt