Emerging markets debt has been dealt a blow as synchronized global growth falls apart, according to UBS Asset Management.
Sovereign credit in developing countries lost 3.5 percent during the second quarter, increasing this year’s losses to a “disappointing” 5.2 percent, the firm said in a new report. Corporate bonds in emerging markets ended the second quarter down 1.8 percent, bringing losses to about 3.1 percent for the year.
The asset class is falling out of favor amid global uncertainty, according to the report. Turmoil in trade and politics is taking a toll, UBS said, pointing to U.S. tariff showdowns with China and Europe, as well as questions surrounding the impact of recent presidential elections in Turkey and Mexico.
“The positive global backdrop, which supported emerging economies and markets in 2016-17, seems to be faltering,” UBS said. “Economic indicators show the synchronized global growth story is no longer in place.”
While U.S. growth has remained strong, Europe and some emerging markets have softened. Heightened protectionism seen in trade policies will prevent emerging markets from benefiting from the positive impact that global growth usually has on trade, the firm said.
UBS Asset Management estimated that President Donald Trump’s plan, announced this month, to impose higher tariffs on an additional $200 billion of Chinese exports means that more than half of the country’s goods entering the U.S. would face “significantly higher” taxes. China responded to “trade pressure wars” by letting its currency weaken more than markets expected, according to the report.
“Aggressive global trade postures kept markets on their toes, with preliminary data already showing slower trade volumes,” UBS said.
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Emerging markets debt became harder to trade in the second quarter amid outflows from funds focused on the asset class, according to the report. Bond prices in developing countries dropped as a result.
While U.S. dollar debt in emerging markets struggled, bonds denominated in local currencies fared worse, with a “dismal” second quarter, UBS said. A benchmark for government bonds in emerging markets — the JPM GBI-EM index — plummeted 10.4 percent in the three months through June, bringing losses for the year to 6.4 percent.
UBS expects that fixed-income prices in emerging markets will remain volatile in the third quarter due to the potential for deepening trade wars and political uncertainty.
“In the developing world, it is far from clear whether the policies sponsored by the newly elected Presidents of Turkey and Mexico will be market friendly,” UBS said. “Although global macroeconomic conditions remain positive, they have deteriorated at the margin.”
