Bloomberg’s gauge of EM high-yield dollar bonds was the top performing asset in EMs with a a 15% gain year-to-date. — Reuters
DOLLAR bonds from some of the world’s weakest economies have emerged as the bright spot in what’s otherwise been yet another lacklustre year for emerging-market (EM) assets.
While many emerging assets ended 2024 with gains, their returns pale in comparison with those on Wall Street. Among currencies tracked by Bloomberg, just three from the developing world have managed to strengthen in the face of a rising US dollar.
MSCI’s index of EM stocks has notched a 5% return – its second straight year of gains – but that compares with a 17% gain on global equities and 20%-plus on the S&P 500 Index.
Investors in EM local-currency debt, meanwhile, have seen an average 2.1% return.
Emerging-market equities and local-currency bonds “underperform their US peers by default whenever the US dollar strengthens,” said Simon Quijano-Evans, chief strategist at Gramercy Ltd in London.
He said the asset class’s performance in 2025 hinges now on President-elect Donald Trump’s policies, “and what they mean for the US dollar.”
Equities outperformed in Argentina, Pakistan, Sri Lanka and Kenya, while China’s stock index rose almost 15%, its best annual advance since 2020, thanks to Beijing’s stimulus efforts.
Bloomberg’s gauge of EM high-yield dollar bonds was the top performing asset in EMs with a a 15% gain year-to-date, and is set for its best year since 2016.
Countries such as Argentina and Ghana benefited from economic reforms, with some Argentine dollar bonds notching gains of over 100%.
Others, like Ukraine, gained as investors grew more hopeful that a Trump presidency could end its war with Russia.
Some recently restructured Ukrainian bonds have gained more than 45% since September, reports stated.
Such markets far outperformed EM investment-grade debt which returned a meager 1.7% while the broader index of EM debt handed investors a 6.5% gain.
Carlos de Sousa, an emerging market debt portfolio manager at Vontobel Asset Management, is sceptical the high-yield rally can sustain last year’s pace, and said that country and credit selection will be key from here.
“We’re a lot more diversified than usual at the moment, as many of our favourite bets did play out in 2024,” he added.
Meanwhile, a 7.7% gain in Bloomberg’s dollar index kept EM currencies under pressure, with an MSCI gauge set to end last year in the red.
Only the Malaysian ringgit, Hong Kong dollar and Thai baht had managed to strengthen in 2024.
Near the bottom is the Brazilian real which has weakened 21% against the greenback.
The currency was undermined by a budget deficit of about 10% of the country’s gross domestic product.
The Mexican peso is not far behind, having shed 18%, as the prospect of Trump’s trade tariffs weighed.
“The strong underperformance of many Latam currencies was certainly an eye-catcher, especially as they also faced some of the highest real interest rates,” Quijano-Evans said.
The South African rand had depreciated for the fifth straight year against the dollar, yet rising investment, slowing inflation and reform efforts by a new government have slowed its decline.
Analysts predict it to strengthen 15% this year.
Turkiye’s lira closed 2024 with its smallest annual decline since 2020, as high interest rates burnished its appeal to overseas investors. — Bloomberg
Jorgelina do Rosario and Vinícius Andrade write for Bloomberg. The views expressed here are the writers’ own.
