EM: Looking Past Short-Term Volatility

Written by: Global Thought Leadership | June 08, 2018

Source: Bloomberg, June 6, 2018. 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

  • Emerging Market (EM) currencies and debt have had a rough few weeks. Argentina, Brazil, Mexico, South Africa and Turkey have all seen their currencies plummet based on a host of local concerns – i.e. political stability, central bank independence, the threat of impending tariffs, or the belief that the country’s foreign exchange reserves were too small to allow it to effectively defend its own currency.
  • One result: aggregate EM bond returns have sagged. Year to date, U.S. dollar-denominated EM bonds have declined -3.57% and high-yield dollar-denominated bonds fell -4.22%; local-currency government bond returns fell -3.14%.
  • But those declines, along with policies designed to shore up their currencies, have resulted in rising yields – now strong enough to attract the attention of investors with global charters, unconstrained investment mandates and seekers of absolute (rather than relative return).
  • For five-year maturities, those yields include 6.92% for Russia, 8.116% for South Africa, 10.846% for Brazil, 15.270% for Turkey and 21.721% for Argentina.
  • In the ten years ended June 2018, there have been five major spikes in 10-day volatility of U.S. dollar-denominated EM yields, each related to crises in global finance. But over the long-term, the median volatility is low enough for many investors to tolerate some nervous moments.
  • Surprisingly, that long-term volatility is lower, rather than higher, for local-currency EM bonds. U.S. dollar EM bonds, over the ten years ended June 6, 2018, showed a median volatility of 7.84 over the period. But local-currency EM bonds came in at a median of 6.01. That’s despite the higher peak volatility for local-currency bonds of 72.71 on September 30, 2009, vs. the peak of 64.85 on November 3, 2008.
  • The bottom line: with yields high enough to merit attention from active investors, EM bonds, whether denominated in U.S. dollars or local currencies, can be worth the time needed to understand the risks they represent – especially in times of financial disruption.


All data Source: Bloomberg, June 7, 2018.

The Barclays EM U.S. Dollar Aggregate Bond Index includes dollar-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.


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.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

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.

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