Emerging markets debt: more room to run

Positive ending for 2020 as fundamental tailwinds grow

2020 was as one of the most volatile years for emerging market (EM) debt, but in the end displayed the asset class’s resilience once again. High returns in the asset class are not easy to come by – navigating its volatility is the key – and 2020 was the perfect example for it. The asset class suffered the worst quarterly drawdown in almost 20 years in the first quarter, only to be followed by its second-best quarterly return. Despite temporary volatility levels as high as those during the global finan-cial crisis, all segments of the asset class finished the year in positive territory (see Chart 1). EM sovereigns returned 5.3%1, benefiting from significant spread tighten-ing in the fourth quarter, as well as from their longer interest-rate duration profile in an environment of declining US Treasury yields. This also helped EM corporate bonds, which returned 7.1%, outperforming their sovereign counterpart not only on an absolute, but also on a risk-adjusted basis, experiencing lower levels of volatility during the depth of the crisis. Meanwhile, local currency debt gained 2.7%, predom-inantly driven by a strong fourth quarter rally in EM currencies.

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