December 2020 Commentary

In emerging markets (EM), fixed income indices closed the year with decent total returns. Last year’s supply set a historical record of USD 243 billion. This was well absorbed, as demand was supported by abundant global liquidity and historically higher yields. Issuance was dominated by IG sovereigns, which priced three quarters of the total amount.

China is an important part of EM growth dynamics. The world’s second-largest economy is leading the global restart in activity, with its growth going from strength to strength. This bodes well for the rest of the EM world. Yet EM economies are also susceptible to the policy direction of China. It is worth highlighting the deteriorating diplomatic relations with its key trading partner, namely Australia. Furthermore, new tensions between China and the US continue to fester, with the threat of delisting Chinese companies from US exchanges over reporting practices keeps growing. Certain Chinese government-linked companies in the telecommunications sector have already been banned.

Manufacturing continues to show resilience, outperforming the service sector, a theme which has been witnessed since the commencement of the pandemic inflicted restrictions. The positive data has been a cornerstone for confidence in the markets. Despite a higher than average savings rate, the trend is now significantly downwards, as businesses and consumers have better visibility over a return to normality. Concerns remain over the ability to rollout the vaccine within the first half time-frame due to logistical challenges, an issue considered more particular to less developed nations. The rollout of the newly approved Oxford vaccine should abate some of those concerns, as the vaccine is easier to handle from a logistical point of view.

On the macroeconomic front, China has continued to print positive figures as the latest Manufacturing PMI came in above expectations at 54. China’s Foreign reserves jumped to $3,178bn in November from $3,128bn in October (consensus $3,150bn).

China reported stronger results in its leading indicators, as business activity normalises further, following widespread company shutdowns and travel restrictions earlier in the year. The latest GDP growth reading stands at 2.7% for the third quarter of 2020 and is expected to accelerate further as economies ramp up in 2021.

From the Latin America region, economic data in Brazil remained encouraging, with manufacturing PMIs reporting at 61.5 from 64.0 in November and similarly services remaining in growth territory at 51.1. Yet, there are growing concerns over the Covid-19 outbreak in Brazil and the delay in the country’s reform and fiscal consolidation agenda. Despite substantial gains in terms of trade and exports, domestic risks are strong. Something will have to give as the combination of a weak currency and sharp commodity appreciation would be difficult to sustain for two years in a row without pass-through into domestic prices.

From a technical perspective, EM debt is expected to keep pace with high yield credit in developed markets, as higher yielding debt looks attractive to investors in search of income.

In the month of December, the CC EMBF increased by 1.3%, in line with the benchmark. Going forward, the Manager will continue to assess the EM space scenario even on the basis of further monetary policy actions taken by Central Banks, which seem to follow the Fed’s accommodative stance.