Executive Summary
- Emerging currency valuations continue to look attractive according to our methodology, especially relative to the USD. Valuations do not look as attractive as the previous quarter due mainly to a rally in most EM currencies against the USD.
- 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 over the past quarter.
- External debt moved further into “rich” territory on the back of a strong compression in spreads over the quarter.
- The first few weeks of the second quarter have been eventful, with South African president Jacob Zuma having taken measures to consolidate his power in order to fend off demands for his resignation; in the process, he has fired his well-regarded Finance Minister. This has led to rating downgrades and a collapse in the rand. El Salvador has missed a payment on a local bond, while reassuring markets it will not default on external debt. Meanwhile, rhetoric between the US and Russia over Syria has intensified, but a summit meeting between President Trump and Xi Jinping was cordial with no major pronouncements from either side.
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