Review
The average yield of the JP Morgan Global EM Diversified index was almost unchanged in February, ending the month at 6.33%. The 10-year UST yield declined by c. 35 bps to 4.21%.
In the FX market, the broad-based USD rally that began in October started to reverse amid volatile trading. The MXN and other EMD currencies were volatile amid uncertainty regarding the potential tariffs proposed by the Trump administration. On balance, emerging market currencies were almost unchanged against the USD.
The MXN strengthened slightly and was the best-performing EMD bond market in local terms as Mexican bond yields declined by more than 50 bps in anticipation of a potentially weaker economy. Other Latin American countries like Chile and Colombia also showed positive returns in both local and USD terms.
Performance
Emerging bond yields in local currency were almost unchanged on balance in February, resulting in a positive return in local terms. The return of the JP Morgan Global EM Diversified index was also higher in USD terms as EMD currencies were on balance almost unchanged in February.
Mexico (3.86%), Chile (3.64%) and Colombia (3.14%) were the best performers in the Fund, while Turkey (-1.58%) and China (-0.98%) fared worst.
Our overweights in Peru and the Philippines had a positive impact on relative returns, while the overweight in India and the underweight in Mexico had a negative impact.
Outlook
While control of both Congress and the White House gives the new US administration a clear mandate, the extent and timing of the rollout of Trump’s flagship policies, including import tariffs, remain unclear. Given the uncertainties, the risk of non-linear outcomes is higher than usual.
For EM economies, a trade shock would at least come in the context of normalising economic cycles, with monetary tightening already having brought inflation under control and commodity prices supportive. However, EM central banks will need to tread a fine line to balance the impact of tariffs and the imported upside inflation risk created by higher US policy rates and a strong USD. For specifically targeted countries such as China, the growth shock from increased tariffs is likely to dwarf inflation concerns when deciding monetary policy.