Recession spurs pivot to emerging markets

As panic over inflation gives way to fears about a global recession, emerging-market investors are making a pivot too — they’re now favouring countries where interest rates are still low.

Investors have snapped up local bonds from Indonesia and Thailand, where benchmark rates had hovered around the record lows to which they were cut during the depths of the pandemic. The same happened with debt from India, where the central bank has delivered just one hike.

That’s a reversal from the first months of the year, when low-yielding bonds were dumped in favor of debt from nations like Brazil and Chile, which led the world’s tightening cycle. But with fears of recession superseding concerns about prices over the past weeks, even as inflation continues to spur pain from Sri Lanka to Argentina, having high interest rates is no longer seen as the benefit it once was. It could even be viewed as a drawback when low inflation and growth are at a premium.

“These countries will be in better position to fight a global slowdown, but they are in this position because the rise of inflation in these Asian countries has lagged other countries in the first place,” said Sebastien Barbe, head of emerging market research at Credit Agricole CIB. “Countries with already high inflation a few months ago had less choice to keep rates low.

Of course, while some countries will do well from investors’ emphasis on growth, others will look even weaker. There’s US$237 billion of emerging-market sovereign debt trading at distressed levels, according to data compiled by Bloomberg. And a high profile default by Sri Lanka — which is in the midst of negotiations with the International Monetary Fund and is set for a new prime minister and president — has spurred concerns that more non-payments could follow.

Still, Central Asia and Asia Pacific are the only two regions in emerging markets handing local-currency bond investors positive returns this month, according to a Bloomberg index. The worst performers, meantime, are Latin America and Eastern Europe. – Bloomberg