With a total return of 10% for the CEMBI Diversified index, 2016 was a strong year for EM corporate debt, in large part due to a significant (140 bps) tightening of spreads. The outlook at the beginning of 2016 was not that positive. Investors had a lot of concerns about China, commodity and oil prices were moving in the wrong direction and there was political uncertainty in countries like Brazil. However, EM growth expectations improved, not only on an absolute level, but also relative to developed markets.
Brexit did not turn out to have a negative impact on sentiment and also the impact from the US election outcome was not that bad for EM corporates. Spreads recovered quite quickly from an initial widening. Although the rise in US Treasury yields, which accelerated after Trump’s election win, had a negative impact on performance, emerging markets did not sell off as US bond yields rose for good reasons, namely an improving outlook for both US and global growth. Most emerging markets are now less vulnerable than before.
Looking into the returns of 2016, commodity-related bonds performed very well. The metals & mining sector returned 34%, which is quite unusual for fixed income. We have been a bit cautious in this sector as there were a couple of companies that would not have survived if commodity prices had not increased. Our exposure to the energy sector helped performance as well; the oil & gas sector returned 12%.
Latin America has benefited the most from the recovery in commodity prices. The total return of Latin America was 14% in 2016, which made it one of the best performing regions in our universe. Russia, which also has a large energy exposure, showed a 16% total return.
The more defensive regions in the EM corporate universe, which are safe havens in more difficult times, returned less than the market average in 2016: Both Asia and the Middle East returned ‘only’ 6%.
Joep Huntjens is lead portfolio manager EM Corporate Debt at NN Investment Partners. He is also head of Asian Fixed Income and lead portfolio manager Asian Debt Hard Currency.