Senior Portfolio Manager Anthony Kettle’s weekly BlueBay Emerging Market Debt commentary offers readers a concise yet wide-ranging macro overview. Kettle covers markets large and small, providing insight on how financial, political, and economic developments in one region affect markets elsewhere. Here is his latest insight.
Summary
Risk markets benefitted this week from further diplomatic progress around Iran, which led to lower oil prices, although a hawkish tilt from the Federal Reserve (Fed) repriced rates markets. This resulted in the S&P 500 gaining +1.4% and the Euro Stoxx 50 gaining +4.4%, while emerging markets (EM) equities also gained +7.5%. The US rates curve saw a bear flattening, with 5-year yields up 5 basis points (bps) and 30-year yields down 6bps. 10-year US real rates were 3bps higher to end the week at 2.18%.
In EM credit markets, spreads were 6bps tighter for corporates and 11bps tighter for sovereigns, while total returns were +0.3% and +0.8%, respectively. In the corporate space, the transport and real estate sectors outperformed, while the industrials and infrastructure sectors underperformed. In the sovereign space, the notable performers were Ukraine, Bolivia, and Egypt. The biggest underperformers were Venezuela, Angola, and India.
In EM local markets, returns were up +1.1%, with foreign exchange (FX) contributing +0.3% and rates +0.8%. In the FX space, the outperformers were the Indonesian rupiah, Indian rupee, and Chilean peso, while underperformers were the Malaysian ringgit, Turkish lira, and Brazilian real. In the rates space, Turkey, South Africa, and the Dominican Republic outperformed, while Brazil, Serbia, and Peru underperformed.
Market highlights
In Colombia, Abelardo de la Espriella won a narrow run-off victory with 49.66% vote share, compared to Senator Iván Cepeda's 48.70%, in what marks a decisive shift toward market-friendly policies centred on security, fiscal discipline, and hydrocarbon revival. Market attention will now pivot to governability—particularly whether Abelardo de la Espriella can manage opposition, build a functional congressional coalition, and implement meaningful reforms. While the policy reorientation should improve the outlook for oil and gas development, fiscal consolidation efforts are unlikely to fully stabilise Colombia's deteriorating public debt dynamics over his tenure.
Market outlook
Geopolitical tensions have eased materially following constructive developments in US-Iran negotiations. A roadmap towards a potential deal within 60 days, complete with technical working groups, de-escalation mechanisms for Lebanon, and direct communication channels, means markets are now able to look past the conflict. Critically, oil flows through the Strait of Hormuz have picked up, with Brent crude falling to the mid-70s and substantially easing investor concerns around inflation, as evidenced by material declines in 1-year US inflation swap rates. Offsetting this geopolitical relief, central banks have shifted markedly hawkish. The Fed's latest decision saw 9 of 18 officials signal rate hikes this year, with markets now pricing close to two hikes by December.
For EM fixed income, lower oil prices will be a significant positive, and in some ways a more credible Fed and lower forward inflation will ultimately be helpful for EM, but in the short-term the Fed policy tilt is likely to create some volatility. Inflows into the asset class remained solid, with flows positive for both hard and local currency last week. The election in Colombia again highlights the more market-friendly pivot that we are seeing from many Latin American countries, and we still retain a preference for this region. Overall, the combination of contained oil, improving flows, and reasonable all-in yields offers attractive opportunities in EM credit, but core inflation bears close watching as the most realistic risk to the asset class.
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