Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 397

Three themes for emerging market debt in 2021

1. Central banks’ ongoing provision of huge amounts of liquidity is cause for cautious optimism this trend will continue.

Around the world, central banks have bought record amounts of bonds and other assets as part of the response to COVID-19, in the process injecting record amounts of liquidity into financial markets. Emerging nations, where central banks have in some instances deployed quantitative easing and unconventional policies for the first time in many years, have been no exception.

As a result, investors around the world are flush with cash. With fixed-income assets in developed markets offering low prospective returns, global demand for emerging-market debt (EMD) particularly hard-currency sovereign bonds, has been strong.

While the deployment of vaccines holds out the prospect of more buoyant economic conditions in 2021, central banks are likely to be wary of tightening monetary policy in a hurry. This should continue to underpin demand for higher-yielding assets such as EMD, not least given its ability to offer genuine portfolio diversification.

2. The coronavirus outbreak has had a very different impact on emerging nations’ economies. In general, Asian states have coped relatively well, while others, most notably in Latin America, have been hit far harder.

The economic picture for 2021 looks somewhat brighter, although investors, as ever, need to be aware EMD is not a homogenous asset class. Whereas some countries are likely to emerge from the pandemic relatively unscathed over time, others have been gravely affected.

The rapid deterioration in the economic environment led to emerging nations’ currencies depreciating sharply. This helps explain why hard-currency EMD outperformed local-currency debt by a wide margin in 2020.

We still favour hard currency debt. However, local currency debt could begin to look increasingly attractive if the global economic backdrop improves faster than we currently expect, for example following the roll-out of vaccines.

3. The glut of global liquidity enabled emerging countries to implement monetary and fiscal policies that were extraordinary in both scale and implementation. However, there is now a notable risk for some EM economies that as the world begins to return to some form of normality, the sustainability of many of these policies starts to be questioned.

The market has so far given emerging countries the benefit of the doubt because the world has been flooded with liquidity. The risk for some is that, as and when central banks start to turn off the taps, the tide begins to go out.

Yields in developed bond markets remain extremely low. Should the deployment of vaccines lead to a stronger economic recovery, it is likely we will see developed market yields rising. In that environment we would expect to see EMD investors become much more discerning.

Many emerging countries have been experiencing weaker economic growth for a decade prior to Covid-19 after international trade plateaued and they failed to implement structural reforms. While vaccines may lead to a decent economic rebound in 2021, worries over emerging countries’ longer-term growth prospects are likely to persist.

That makes it more probable investors will at some point begin to question the ability of some countries to get government debt, which has ballooned in 2020, back under control. The sustainability of monetary policy could also be called into question.

In summary

Within financial markets, nowhere are the seismic changes brought about by the coronavirus pandemic more evident than in emerging markets. The provision of unprecedented levels of support by both central banks and governments has helped stabilise markets.

Even with vaccines offering the prospect of economic recovery, that support seems unlikely to be withdrawn in a hurry. For now, that could encourage further risk taking, perhaps leading local-currency debt to outperform. However, investors are walking a tightrope. They need to be mindful of the long-lasting damage that has been done to many countries’ finances and be on the lookout for any signs central banks may withdraw liquidity sooner than expected.

 

Liam Spillane is Head of Emerging Market Debt and Portfolio Manager, EM Local Currency at Aviva Investors. This article is for general information purposes only and does not consider any individual’s investment objectives, financial situation or needs.

 


 

Leave a Comment:

RELATED ARTICLES

9 ways that global markets are changing

The RBA’s QE losses

Recessions are usually good for sharemarkets

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.