Emerging Markets Fixed Income

Emerging markets debt was a focus of particular attention in the Committee’s discussion again this quarter. After a prolonged debate, the Committee maintained its slightly overweight view for the asset class, in line with members’ preference for spread sectors and risk overall.

Although the potential for further dollar strength is a worry for EMD, yields remain attractive, particularly considering that a large portion of the asset class is rated investment grade.

The Committee maintained its views on EMD subsectors, and reiterated its belief that active management across all parts of the EMD marketplace continues to be valuable.

Hard currency sovereign debt

The Committee continues to hold an overweight view on hard currency sovereign debt. Fundamentals are experiencing a negative trend given the oil price shock and geopolitical developments, but Committee members remain comfortable with overall credit quality.

Hard currency corporate debt

Committee members are less sanguine on hard currency corporates. EMD fundamentals have become more negative in this sector due to weaker GDP and export growth forecasts on the back of lower commodity prices. Shorter-duration securities are viewed as one of the most attractive components of this EMD category.

Local currency sovereign debt

Strong U.S. employment figures have bolstered expectations of a Fed rate hike and dollar strength, driving a less favorable view for local currency sovereign bonds.

Emerging Markets Debt: Showing Improving Creditworthiness

EM Sovereign Spreads and Investment Grade Weight in EMBIG Index

Sources: Bloomberg, JP Morgan. Monthly data December 1997 – February 2015. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

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