State Street SPDR ETF's: Investors move into Emerging Market Debt

State Street SPDR ETF's: Investors move into Emerging Market Debt

February 6, 2023

Emerging Markets Fixed Income
Emerging Markets (02) EM Opkomende landen Azië

In its latest Strategy Espresso Gathering Momentum: Investors Move into Emerging Market Debt, State Street SPDR ETFs has examined the in- and outflows of European investors.

Below is a summary of its two main conclusions:

  • Judging by the flows, many European fixed income investors have put the woes of 2022 behind them and focused on emerging market debt as one area to take on some risk – they’ve purchased $950 million in EM debt ETFs through the first 26 days of the year.
  • We see three main reasons why EM debt has seen so much attention and believe these factors could continue to support EM debt in the coming months:
    • The yield is historically high with a yield to worst of more than 6% on the Bloomberg EM Local Currency Liquid Index. Coupon returns alone for 2022 were 4.8% so, even if the markets stay at similar levels for much of the year, EM debt strategies could still generate meaningful returns.
    • We believe the USD has further to depreciate over the course of the year. While it has cheapened versus EM currencies, it continues to look expensive according to the State Street Global Advisors long-term model of USD value and therefore could continue its decline as the Fed rate cycle turns. This should help to support EM returns.
    • The turn in the policy cycle has arrived for several EM central banks. There remains speculation that Banco Central do Brasil and the Hungarian central bank may ease policy in the not too distant future. The South Korean central bank signalled that it sees its rate hike cycle as being at an end and the South African Reserve Bank tightened policy only 25bp instead of the 50bp predicted by economists, a sign that rates may be close to the top. 

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