Research & Insight

Against the odds, former Prime Minister, Thaksin Shinawatra’s party regained power over the Democrat Party at the July 3rd Thai general elections. The Pheu Thai Party (PTP) won by simple majority, taking 265 out of 500 seats. The PTP is likely to be led by Thaksin’s sister, Yingluck Shinawatra, with Mr Thaksin still living in exile from Thailand.

Emerging markets local currency debt had a strong start to the second quarter, rising nearly 5% in USD terms in April with all countries in our benchmark except for Peru posting positive returns. However, these gains could not be sustained with investors increasingly worried about the outlook for developed markets and what impact a negative credit event in the US or Europe would have on commodity prices, demand for emerging market exports and the availability of investment capital. JP Morgan’s GBI EM Global Diversified index finished the quarter up 4% after a volatile, but directionless May and June.

The chart above shows one year Credit Default Swap (CDS) prices for both Brazil and the US. This is essentially the insurance premium the market asks against a default on the sovereign debt of a nation – the lower the number, the cheaper the premium and hence, the lower the implicit probability that a sovereign nation will default on its debt.

Returns for emerging market local currency sovereign bonds turned negative in May with the GBI EM Global Diversified benchmark losing 1.20% in US dollar unhedged terms. The losses can mainly be attributed to the problems surrounding debt sustainability in Europe and the contagion effects this had for emerging European countries. We have been underweight the region for some time which significantly helped performance this month.

Performance for emerging market local currency sovereign debt was again very strong in April, with the GBI EM Global Diversified benchmark rising 4.73% in US dollars. With the exception of Peru, all benchmark countries posted positive returns for the month.