EM Bonds: Deep Doubter's Discount

Written by: Global Thought Leadership | December 07, 2018

Chart Courtesy of Western Asset Management.  Source: J.P.Morgan, Bloomberg, as of Nov 12, 2018. * Index: J.P. Morgan GBI-EM Global Diversified Index FX Return. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • Between a strong U.S. dollar, headlines about Brazil, Russia, Argentina and Turkey, and the beginning of the end of central bank largesse, investors in Emerging Market (EM) bonds have not had much to celebrate this year.
  • But one notable result of the onslaught has been some of the most heavily-discounted valuations available within the universe of fixed income investing.
  • Clearly, a good part of that discount was a function of falling fundamentals. But as in any heavily discounted asset group, it’s worth asking if the market has become unduly pessimistic – creating potential buying opportunities
  • Consider EM currencies. As of early November, the currency component of EM returns over the past five years – that is, the share of asset class performance affected by the fall of its currencies alone – is down over 35%.
  • That’s one reason Western Asset, in CIO Ken Leech’s quarterly outlook, singles out EM debt as the most undervalued asset class at current levels – the direct result of the current level of skepticism. The deep discount offered by the EM sector thus may merit a second look for investors seeking return as well as diversification.   



The J.P. Morgan GBI-EM Global Diversified Index FX Return measures the currency component of the return of the J.P. Morgan Global Bond Index – Emerging Market Global Diversified (GBI-EM). The J.P. Morgan Global Bond Index – Emerging Market Global Diversified represents the performance of Emerging Market bonds in all geographies.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.