Emerging Markets Market Review and Outlook

Emerging Markets: Market Review and Outlook Q3 2021

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Emerging Markets Portfolio Team
SEP 30, 2021

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Market Review:

The third quarter in Emerging Markets (EM) was driven by rate volatility and China headlines. July and August were relatively quiet yet constructive months for the asset class. It wasn’t until September that inflation fears and slow growth mixed with a resurgence of China headwinds put pressure on spreads, leaving EM hard currency bonds with their biggest monthly loss since March 2020. Rates started the quarter with the 10-year treasury yield at 1.47%, hit a low of 1.18% at the beginning of August, and then saw a significant sell-off at the end of September to close out the quarter at 1.49%1 .

Global markets are pricing in greater risk coming from a confluence of factors playing out presently in China. The property sector is cooling due to macroprudential tightening, and Evergrande, a large player in the space, is facing liquidity strains that could lead to the largest default ever in the property sector. In addition, the recent escalation of regulatory tightening in pursuit of the CCP’s “common prosperity” goals, which include tutoring, tech, and gaming, have added to the pressure. The “Zero Covid” policy as China’s second wave is intensifying has caused an economic slowdown that had already been underway since 2Q21. All of these factors could weaken China’s economic growth and have spillover effects into the global economy.