22 Nov 2023 4 min read

Navigating the storm – emerging market debt

By Raza Agha , Viraj Nadgir

Emerging market (EM) credit has had a difficult two years. For most equity and bond investors, 2022 proved to be the perfect storm, with the war in Ukraine exacerbating inflationary pressures and the US Federal Reserve (Fed) embarking on policy normalisation.


The following is an extract from our Q4 Active Insights publication.

While price pressures are receding in 2023, stronger than-anticipated US economic data and concerns about sticky inflation have led to continued pressure on central bank rates.

Consequently, while EM sovereign and corporate spreads are tighter year-to-date[1], negative US Treasury returns have weighed on the performance of the asset class, triggering outflows from dollar-denominated emerging market hard currency funds.

Indeed, 15 out of the last 21 months have seen negative Treasury returns, including an unprecedented five consecutive-month streak over May to September 2023[2], while 19 out of the last 21 months have seen outflows from EM hard currency funds[3]. As we head into 2024, will the tide finally turn for the asset class?

A resilient macroeconomic context

The latest forecasts from the International Monetary Fund suggest the global economy will continue to grow this year and next. That, in part, is a reflection of two factors: resilient growth in emerging markets, which is expected to increase by 4.0% this year and 4.1% in 2024[4], and the fact that emerging markets remain global growth drivers, reflecting their rising importance in the world economy.

With the slowdown in advanced economies, these forecasts imply that growth differentials between emerging markets and developed markets will rise to 2.5% this year and 2.7% in 2024 - their highest level in a decade[5].


The resilience of emerging markets is not just apparent in growth indicators, but also in the external sector. EM foreign exchange reserves remain at healthy levels, 2.5x higher than total external debt amortisation due over the next 12 months, or approximately 13 months of imports, despite many countries being shut out of the global capital markets[6].

Yields – riding the crest of a wave?

Given the above context, we believe the yield argument remains compelling for EM credit. The hard currency sovereign index is currently yielding 9.0%[7], while the corporate index stands at 7.9%[8]. At the time of writing, yields had only ever been this high at around the time of the global financial crisis. Meanwhile, in EM investment-grade debt, while spreads are tight compared to historic levels, we have seen continued demand, given the yield pickup over developed markets. Furthermore, although EM issuance has picked up this year, it has been front-loaded, while net supply will still be the second lowest since 2015[9].

What could blow markets off course?

Having thought we were near the peak of the interest-rate cycle, investors have been contemplating the ‘higher for longer’ narrative since Jay Powell’s hawkish comments at September’s FOMC meeting. Given stronger-than-expected US economic resilience, the Fed has continued to remain data dependent, and any future economic surprises may lead to further volatility in interest rates, in our view. Our base case remains that the Fed has almost finished hiking and, coupled with the anticipated downturn in US growth dynamics, we believe that will eventually imply a rally in the prices of US Treasuries.

Tied to timing the turn in US rates, the risk remains EM outflows, which have persisted throughout the year, although at a slower pace than in 2022. Our view is that EM spreads could come under pressure if selling continues, although EM hard currency funds have historically never seen two consecutive years of outflows[10].

Investor implications

Despite the pressure from rising interest rates, EM credit has delivered positive returns this year[11]. The supportive macroeconomic conditions that have prevailed in 2023, we believe, are expected to continue into 2024. Given our view that we are nearing the peak in US interest rates, we believe the opportunity to lock in yields (and hence income) at these levels is rare.

Furthermore, the strong prevailing technical factors we are currently experiencing – issuance remaining low, with supportive cashflows and investor cash balances high – add weight to our conviction.

The above is an extract from our Q4 Active Insights publication.


[1] Source: Bloomberg as at September 2023.

[2] Source: Bloomberg as at September 2023.

[3] Source: JP Morgan as at 30 September 2023.

[4] Source: IMF as at June 2023.

[5] Source: IMF as at June 2023. Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

[6] Source: Bloomberg as at September 2023.

[7] Source: JPM EMBI GD Index as at end September 2023.

[8] Source: JPM CEMBI BD Index as at end September 2023.

[9] Source: JPM, Bloomberg Finance L.P. as at end of September 2023.

[10] Source: JPM, Bloomberg Finance L.P. as at 23 August 2023.

[11] Source: Bloomberg as at 29 September in total return terms for EM hard currency credit.

Raza Agha

Head of Emerging Markets Credit Strategy

Raza Agha joined LGIM as Head of Emerging Markets Credit Strategy in February 2019. He has over 23 years of experience in EM sovereign credit/macro research and strategy at commercial, investment, multilateral and central banks. Raza was most recently at VTB Capital in London where he was Chief Economist, Middle East and Africa, while also servicing internal clients on global emerging markets. He has previously worked with the Royal Bank of Scotland, Samba Financial Group, Bear Stearns, Central Bank of Pakistan, Abn Amro, and has been a consultant to the World Bank and Asian Development Bank. Raza graduated from Cornell University with two Master’s degrees in public administration and development policy. His undergraduate degree is in Economics from University College London.

Raza Agha

Viraj Nadgir

Fixed Income Investment Specialist, Fixed Income / Global Fixed Income

Viraj is a Fixed Income Investment Specialist within the Global Fixed Income Team having over 10 years of experience in the finance industry. He joined LGIM in 2021 and previously worked at JP Morgan Asset Management within the Fixed Income Investment Specialist team covering US Investment grade strategies. He has also worked at Royal Bank of Scotland alongside the Debt Capital Markets team. Viraj holds a Master’s degree in Finance from University of Mumbai.

Viraj Nadgir