Before visiting this website, you should confirm that you are a qualified investor within the meaning of the Prospectus Regulation (EU) 2017/1129 of 14 June 2017.
You should make sure that the rules you are subject to allow you to subscribe to shares and/or units of the Collective Investment Schemes (“CIS”) mentioned on this website. Certain rules (including rules on public offering and/or marketing of CIS) may, depending on the country where the CIS are marketed, impact the marketing options for CIS and restrict the marketing thereof to certain types of investors.
I hereby acknowledge that I am aware of the rules applicable to me and I wish to access this website.
By accessing this website, I confirm that I have read and approved the legal notice
"Legal Information and Website Terms and Conditions of Use".
At an index level, the spread between local currency emerging market yields and global aggregate yields is back to pre-GFC levels. Does this mean that local currency spreads are too tight? Indices are too narrow and have a clear overweight to Asian local markets. Many of these markets have local yields below US treasuries.
Bond markets typically witness end-of-cycle volatility. The novel combination of monetary tightening and fiscal easing results in even more uncertainty. Supply worries, the Fitch downgrade of the US rating, higher energy prices, and a stronger than expected state of the US economy, have pushed 10-year US Treasuries yields firmly back above the 4.00% handle. In tandem, Latin American central banks have started easing with high real rates suggesting aggressive moves are possible. The combination of still peaking rates in developed markets and easing rates in emerging markets has helped narrow the spread differential considerably since its March 2022 peak.
At an index level, local currency emerging markets’ yields versus global aggregate yields are around 300bp, in line with pre-GFC levels. Local yields in some emerging markets are tight versus US treasuries relative to historical levels; in some countries – almost exclusively in Asia – local yields actually trade inside those of the US.
The composition of local currency indices diminishes their accuracy in representing the asset class. First, local currency indices are not well diversified as they typically contain a maximum of just 20 countries. Furthermore, the top 5 countries in these indices typically account for 50% of the overall indexi weighting and the top 10 countries generally account for 85%. Second, there is an overweight towards Asian countries with names from the region making up 40% of the JP Morgan GBI-EM and 52% of the Bloomberg Barclays local currency index. There has been a drastic change in the composition of indices lately, with the inclusion of China (at the maximum 10% weight), the exclusion of Russia (around 7.5% weight), and the collapse of Türkiyeii, which has resulted in a negative impact on the index yield. Index investors, over the last 10 years, lost between 15% and 20% as a result of defaults in combination with distressed countriesiii.
The chart below depicts the spread between the JP Morgan GBI-EM local currency index and the global aggregate index (blue) and the spread between an active, non-benchmarked strategy and the global aggregate index (green). The bars show the difference between the two. Until China’s inclusion, both had approximately the same yield. Today, the yield gap has widened towards 200bp!
At an index level, local currency yields and spreads appear to trade at very expensive levels. Actively managed, well-diversified funds can achieve superior yields and spreads. As a result of this far greater diversification, annual carry on actively managed funds is currently around 2% higher than benchmarks.
Source: DPAM, JP Morgan, 21 .08.2023
[i] Most local indices cap the country weight at 10%
[ii] In 2016, the weight of Turkiye in the JP Morgan GBI-EM index was 10%, today it is 0.79%
[iii] Venezuela (0.7%), Argentina (3.5%), Russia (7.4%), Egypt (1.5%), Türkiye (9.0%) – Estimation based on weight changes within the local currency index.
Degroof Petercam Asset Management SA/NV l rue Guimard 18, 1040 Brussels, Belgium l RPM/RPR Brussels l TVA BE 0886 223 276 l
Marketing communication. Investing incurs risks. Past performances do not guarantee future results.
Degroof Petercam Asset Management SA/NV, 2022, all rights reserved. This document may not be distributed to retail investors and its use is exclusively restricted to professional investors. This document may not be reproduced, duplicated, disseminated, stored in an automated data file, disclosed, in whole or in part or distributed to other persons, in any form or by any means whatsoever, without the prior written consent of Degroof Petercam Asset Management (DPAM). Having access to this document does not transfer the proprietary rights whatsoever nor does it transfer title and ownership rights. The information in this document, the rights therein and legal protections with respect thereto remain exclusively with DPAM.
DPAM is the author of the present document. Although this document and its content were prepared with due care and are based on sources and/or third party data providers which DPAM deems reliable, they are provided without any warranty of any kind, either express or implied. Neither DPAM nor it sources and third party data providers guarantee the correctness, the completeness, reliability, timeliness, availability, merchantability, or fitness for a particular purpose.
The provided information herein must be considered as having a general nature and does not, under any circumstances, intend to be tailored to your personal situation. Its content does not represent investment advice, nor does it constitute an offer, solicitation, recommendation or invitation to buy, sell, subscribe to or execute any other transaction with financial instruments including but not limited to shares, bonds and units in collective investment undertakings. This document is not aimed to investors from a jurisdiction where such an offer, solicitation, recommendation or invitation would be illegal.
Neither does this document constitute independent or objective investment research or financial analysis or other form of general recommendation on transaction in financial instruments as referred to under Article 2, 2°, 5 of the law of 25 October 2016 relating to the access to the provision of investment services and the status and supervision of portfolio management companies and investment advisors. The information herein should thus not be considered as independent or objective investment research.
Investing incurs risks. Past performances do not guarantee future results. All opinions and financial estimates in this document are a reflection of the situation at issuance and are subject to amendments without notice. Changed market circumstance may render the opinions and statements in this document incorrect.