A useful source of portfolio diversification
Lauréline Renaud-Chatelain, Fixed Income strategist Pictet Wealth Management.
- Local-currency emerging-market (EM) sovereign bonds have posted strong returns in 2023, outperforming their developed-market (DM) peers. Hard-currency EM corporate bonds have also risen in value over the year, performing in line with DM credit.
- Headline inflation has fallen significantly over the course of the year, enabling some EM central banks, especially those in Latin America, to cut rates. This has forced down sovereign yields. Central banks in Asia (apart from China) have been more cautious with respect to rate cuts.
- We expect local-currency EM sovereign yields to fall from 6.6% (as of 24 November) to around 5.5% by the end of 2024, driven by falling inflation and additional rate cuts. Given their low correlation to developed-market bonds and their expected outperformance next year, local-currency EM sovereign bonds are an attractive source of portfolio diversification. We remain overweight in this asset class as we expect it to deliver a high-single-digit return in 2024.
- Hard-currency EM corporate bonds have been providing attractive yields (around 7.7% at 24 November), and as such represent an attractive source of carry. However, it is important to focus on high-quality issues. We expect spreads to remain close to their current levels, ending 2024 at around 330bp. We expect Asian investment-grade corporate bonds to provide a high-single-digit total return in 2024.
