Quarterly EM Debt Update | 2Q 2017

Emerging Debt Valuation Update: 2Q17

Authors

Carl Ross

Dr. Ross is engaged in research for GMO’s Emerging Country Debt team and a partner of the firm. He leads the team’s research in fundamental sovereign credit, with a primary emphasis on Asia, Emerging Europe, Middle East, and Africa. Prior to joining GMO in 2014, he was a managing director at Oppenheimer & Co. Inc. where he covered emerging debt markets. Previously, he was the Senior Managing Director and Head of Emerging Markets Fixed Income Research at Bear Stearns & Co. Dr. Ross earned his bachelor's degree in Economics from Mount Allison University, as well as his MA and PhD in Economics from Georgetown University.

Executive Summary

Emerging currency valuations continue to look attractive according to our methodology, especially relative to the USD. Relative valuation of EM currencies worsened slightly against the USD, and improved against the EUR during the second quarter.
Local debt markets also look attractive, based on real yield differentials between EM and developed market bonds. Differentials remain well above historical norms, even though the differential has fallen slightly over the past quarter.
External debt remained in ‘‘rich’’ territory in the second quarter 2017, but the broad stabilization in credit ratings and credit spreads during the quarter meant that the asset class maintained its valuation metrics (it did not get richer).

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