Research & Insight

Emerging markets rebounded from steep losses in the previous month, rising over 3% in December in dollar terms. The majority of the performance came from FX strength with the balance from the running yield of the bonds. While we still see value in some EM curves, as a group, strong inflows throughout 2010 and generally rising inflationary pressures means that further gains from spread compression are less likely in the short term.

November took back much of the gains experienced in emerging market debt on the back of Federal Reserve Board continued policy of “quantitative easing” of the past few months, with the JP Morgan GBI-EM Global Diversified falling 4.65% in US dollars. Year-to-date the index continues a positive return of 12.16%.

Hungary has found itself front and centre stage in recent weeks with asset volatility unusually high. The forint fell over 13% against the dollar in the last two weeks of November and nearly 5% against the euro for the month. In addition the 10 year borrowing rate increased almost 1.6% in the two months to the end of November.

Absolute returns remained very strong for the asset class in October with the benchmark returning 1.28% in US dollars. Less than 1 percentage point of return can be attributed to currency appreciation relative to the dollar; this is a little lower than the recent average. Emerging market currencies continue to attract strong flows as a result of improved fundamentals and high yields, but the threat of capital controls becoming more widespread is causing investors to be a little more selective in their allocations.

A decade is a long time in economics. This is particularly so in Turkey where the most recent ten years feel closer to an eternity. Back in the nineties you could almost guarantee that any period of strong economic growth would soon be followed by hyper inflation and a subsequent sharp hike in interest rates. If only Turkish capital markets back then were as deep and liquid as they are now, those that make a living forecasting these eventualities could all have retired happily to the beautiful beaches of Bodrum such was the predictability of this trend. But things have changed, comprehensive fiscal and banking reform following the 2001 Turkish crisis has evolved the countries economy beyond all recognition and greatly improved resilience to external shocks. Ironically, it took a global financial crisis for the rest of the world to fully appreciate this.