Why EM local debt may shine brighter

Four factors may work as catalysts in 2020

Emerging market (EM) local debt is not for the faint-hearted. It remains one of the most under-invested asset classes in the world due to its volatility.

Between 2013 and 2015, the US dollar rally associated with the ‘taper tantrum' dragged EM local bonds down 27% (-10% annualised). Since early 2016, EM local bonds regained some ground, delivering 7.5% annualised in USD terms as of October 2019.   Most returns since 2016 have come from income and yield compression as EM countries slashed interest rates. The Brazilian central bank, for one, cut policy rates from 14.25% to 5.0%. Overall, the yield on the main benchmark for local bonds, JP Morgan GBI-EM GD index (GBI), declined from 7.1% at the start of 2016 to 5.1% at the end of Octob...