Quarterly EM Debt Update | 3Q 2018

Emerging Debt Valuation Update: 3Q18

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.

Victoria Courmes

Ms. Courmes is engaged in portfolio management and research for GMO’s Emerging Country Debt team. She is primarily responsible for the team’s local currency debt portfolio and is also the team’s lead liaising with the Developed Rates & FX team’s quantitative researchers on currency and interest-rate strategies. Prior to joining GMO full-time in 2016, she worked at Acadian Asset Management as an Associate Portfolio Manager in Emerging Markets Local Bond Funds. Previously, she worked at Lord Abbett as an International Economist and Currency/ Local Rates Strategist. Ms. Courmes earned her bachelor's degree in Political Science from Barry University and her MA in International Relations from the School of Advanced International Studies at John Hopkins University.

Executive Summary

The punch line: Due to the 26-bp spread tightening in the third quarter (to 362 bps), USD external debt (EMBIG) valuations deteriorated and remain on the expensive side of historical valuations, as fundamentals didn’t improve in a way that justified such tightening. In contrast, for local currency debt (GBI-EMGD), EM currencies declined 1.2% and the yield remained roughly unchanged (-4 bps to 6.62%). Valuation of EM currencies and rates remained mostly unchanged in the third quarter when compared to the second quarter. Our attractiveness measure for EM currencies remains above the historical average. Moreover, the USD remains in “rich” territory while the EUR moved from “cheap” to “rich” territory during the third quarter. Meanwhile, real yield differentials between EM local bonds and developed market bonds remain wide, above historical norms.

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