• Multi-Asset & Macro
  • Emerging Market Debt
  • Emerging Market Debt Opportunities

Liquidity, uneven recoveries and debt sustainability: The outlook for emerging-market debt in 2021

Liam Spillane, head of emerging market debt at Aviva Investors, picks three themes that could have a big say in how the asset class performs in 2021.

Liquidity, uneven recoveries and debt sustainability: The outlook for emerging-market debt in 2021

1. Emerging debt markets look to be on course to deliver positive returns in 2020 after the year got off to a shaky start. Central banks’ ongoing provision of huge amounts of liquidity is cause for cautious optimism this trend will continue.

Around the world, central banks have bought record amounts of bonds and other assets as part of the response to COVID-19, in the process injecting record amounts of liquidity into financial markets. Emerging nations, where central banks have in some instances deployed quantitative easing and unconventional policies for the first time in many years, have been no exception.

Global demand for EMD has been strong

As a result, investors around the world are flush with cash. With fixed-income assets in developed markets offering low prospective returns, global demand for emerging-market debt (EMD) particularly hard-currency sovereign bonds, has been strong,

While the deployment of vaccines holds out the prospect of more buoyant economic conditions in 2021, central banks are likely to be wary of tightening monetary policy in a hurry. This should continue to underpin demand for higher-yielding assets such as EMD, not least given its ability to offer genuine portfolio diversification.

2. The coronavirus outbreak has had a very different impact on emerging nations’ economies. In general, Asian states have coped relatively well, while others, most notably in Latin America, have been hit far harder.

The economic picture for 2021 looks somewhat brighter, although investors, as ever, need to be aware EMD is not a homogenous asset class. Whereas some countries are likely to emerge from the pandemic relatively unscathed over time, others have been gravely affected.

Hard-currency EMD outperformed local-currency debt by a wide margin in 2020

The rapid deterioration in the economic environment led to emerging nations’ currencies depreciating sharply. This helps explain why hard-currency EMD outperformed local-currency debt by a wide margin in 2020.

We still favour hard currency debt. However, local currency debt could begin to look increasingly attractive if the global economic backdrop improves faster than we currently expect, for example following the roll-out of vaccines.

3. The glut of global liquidity enabled emerging countries to implement monetary and fiscal policies that were extraordinary in both scale and implementation. However, there is now a notable risk for some EM economies that as the world begins to return to some form of normality, the sustainability of many of these policies starts to be questioned.

The market has so far given emerging countries the benefit of the doubt because the world has been flooded with liquidity. The risk for some is that, as and when central banks start to turn off the taps, the tide begins to go out.

Yields in developed bond markets remain extremely low. Should the deployment of vaccines lead to a stronger economic recovery, it is likely we will see developed market yields rising. In that environment we would expect to see EMD investors become much more discerning.

Worries over emerging countries’ longer-term growth prospects are likely to persist

Many emerging countries have been experiencing weaker economic growth for a decade prior to Covid-19 after international trade plateaued and they failed to implement structural reforms. While vaccines may lead to a decent economic rebound in 2021, worries over emerging countries’ longer-term growth prospects are likely to persist.

That makes it more probable investors will at some point begin to question the ability of some countries to get government debt, which has ballooned in 2020, back under control. The sustainability of monetary policy could also be called into question.

In summary

Within financial markets, nowhere are the seismic changes brought about by the coronavirus pandemic more evident than in emerging markets. The provision of unprecedented levels of support by both central banks and governments has helped stabilise markets.

Even with vaccines offering the prospect of economic recovery, that support seems unlikely to be withdrawn in a hurry. For now, that could encourage further risk taking, perhaps leading local-currency debt to outperform. However, investors are walking a tightrope. They need to be mindful of the long-lasting damage that has been done to many countries’ finances and on the lookout for any signs central banks may withdraw liquidity sooner than expected.

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

Related views