Are emerging market bonds poised for a comeback?

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The global economy is expected to grow at a steady pace, that is neither too hot nor too cold, while the central bank hiking cycle appears to be in its final stages. Importantly, inflation has started to moderate in many EM countries, and this trend is expected to continue in 2023. The recent fall in food and energy prices will be a key driver here, especially in many EM countries where food makes up a large component of the inflation basket.

From a valuation perspective, we think EM bonds look attractive. Real yields remain elevated in most EM countries and compare favourably with DM yields, which in many cases are still in negative territory. As inflation moderates and central banks start to slow the pace of their rate hikes, we think current yields could look especially appealing.

While defaults are expected to rise quite sharply in parts of the EM bond market, we believe these are likely to be concentrated in specific areas, such as Chinese property, Russia and other distressed areas. It is therefore important to be selective, although for investors who do their homework, we believe that significant value can be found in the asset class.

Past performance is not a guide to future performance.

Source: M&G Bloomberg Deutsche Bank 5 January 2023. Order of bars for each group indicates (left to right): 2019, 2020 and 2021 actual, 2022 and 2023 projections.