IMF 2023 Spring Takeaways: Tailwinds for EM Local Debt
May 19, 2023
Watch Time 4:10 MIN
Eric Fine, Portfolio Manager, Emerging Markets Fixed Income: Hi everyone, I'm here with my colleagues Dave Austerweil and Natalia Gurushina who just attended the spring IMF (International Monetary Fund) meetings and I'm going to ask them some of their takeaways. The reason we go to the IMF meetings—and we've been going for over 30 years—is we meet essentially every finance minister and central banker in the world. In addition, there's trillions of dollars of assets under management in a lot of these rooms, and we get important pulse-taking for the market.
So Dave, during the past month, the decline of the dollar's reserve status has led headlines. In our team, we've been noticing the growing use of EM currencies in trade for oil, for example. How are IMF participants reacting to the story of the decline of the dollar status and the rise of EMs?
David Austerweil, Deputy Portfolio Manager, Emerging Markets Fixed Income: The reversal of globalization and trade fragmentation were the big themes at IMF, but that much explicit talk about de-dollarization. Generally, there is skepticism that the U.S. dollar can be replaced because there isn't any other safe liquid bond market of comparable size. But that misses the point. Market prices react to changes in flows, and those changes only need to be marginally different than the status quo. It just takes China not reinvesting some of its trade surplus into U.S. Treasuries, instead moving a portion of that to Southeast Asian bonds, to make those currencies rally. If this is a slow secular shift, you can see those currencies outperform for years. EM local currency was chosen as the top performer for 2023 among EM investors for the first time in my memory. The level of foreign ownership in local markets is the lowest it has been over the corresponding time period. This is an extremely bullish setup for EM local debt.
Eric Fine: Natalia, what were the most positive economic stories that you gleaned from IMF meetings?
Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income: I would say that whereas the U.S. and Europe face a recessionary or weak growth landscape, there is continued positivity for emerging markets. And this includes several aspects.
Okay, so one interesting story is declining neutral rates in emerging markets and rising neutral rates in developed markets. And this means that EM local currency bonds—and by the way, many emerging markets hiked interest rates far earlier and far more aggressively than developed markets—so basically it means that for EM local currency bonds, there will be a secular tailwind, including from lower inflation.
Eric Fine: Thank you. And Dave, kind of summing up, what did the meetings mean for our portfolio?
David Austerweil: So for our portfolio, this means we are allocated over 50% to EM local debt, especially in countries with strong external surpluses like Thailand, Brazil, and Indonesia. Indonesia is our largest overweight in the portfolio. These markets have exhibited amazing resilience lately with local Indonesian bonds actually being less volatile than U.S. treasuries. And for our U.S. dollar allocations, we favor high yield sovereign bonds that naturally have lower duration and much higher yields relative to U.S. Treasury yields. This gives them the ability to absorb some of the pain that comes from the rise in U.S. interest rates. The countries we own, like Angola and Mozambique, also benefit from higher commodity prices. The repricing of U.S. interest rates due to a hawkish Fed remains the major risk for markets. For this reason, we have very low exposure to the highest quality U.S. dollar EM sovereign borrowers that tend to have low spreads relative to U.S. Treasuries and much longer dated borrowings. Where we do have exposure to these credits is often to the shortest duration portion of the curves.
Eric Fine: Thank you everyone for listening.
Please visit VanEck.com for our written review of the recent IMF meetings. Dave Austerweil wrote a recent piece called, IMF Spring Meetings: A Season of Wishful Thinking. And like I said, you can find that on VanEck.com. Thank you.
IMPORTANT DISCLOSURE
Source: IMF.
International Monetary Fund (IMF) is an international U.S.-based organization of 190 countries focused on international trade, financial stability, and economic growth.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication, and subject to change without notice. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options.
Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity.
Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
You can lose money by investing in the VanEck Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue, New York, NY 10017
Related Topics
Related Insights
Related Topics
Related Insights
April 23, 2024
April 22, 2024
March 19, 2024
February 20, 2024