<\/p>\n
Emerging-market bonds and currencies were whipsawed by the Eurozone debt crisis 15 years ago, but they are now better equipped to withstand any repeat of that turmoil, analysts say.<\/p>\n
Developing nations have improved their fiscal positions in recent years, while their relatively high bond yields offer greater protection. Emerging-market central banks have also demonstrated their independence and earned investors\u2019 trust by navigating previous episodes of upheaval, such as the pandemic.<\/p>\n
Concern over potential contagion from the European bond woes has intensified in recent weeks as the extra yield investors demand to hold French bonds over their German peers climbed to the highest level since the regional debt crisis in 2011. Adding to those fears has been the surge in oil prices caused by the conflicts in the Middle East and Ukraine.<\/p>\n<\/p>\n
\u201cCompared to 2011, EMs are better positioned today, with stronger fiscal dynamics, external balances, and high nominal yields that provide structural resilience,\u201d said Carol Lye, a fund manager at Brandywine Global Investment Management in Singapore. Relatively light positioning in emerging-market currencies also mitigates the risk of any forced selling in a Eurozone contagion scenario, she said.<\/p>\n
Brandywine\u2019s confidence has led it to add to its holdings of Latin American currencies, while maintaining exposure to North Asian ones benefiting from artificial intelligence spending, Lye said.<\/p>\n
The European debt crisis that escalated sharply in August 2011 heightened global risk aversion, prompting investors to favour safer assets and making emerging-market bonds and currencies vulnerable to sudden outflows. The extra yield investors received for holding developing-nation dollar bonds over Treasuries surged to as much as 447 basis points in October of that year, a level that was only surpassed in 2020 during the peak of the Covid pandemic. It is currently about 184 basis points.<\/p>\n
This year though, emerging markets have outperformed their developed-market peers. While 10-year Treasury yields surged above 5% last month to the highest level since 2002, the yield on a Bloomberg index of global emerging-market local-currency debt closed Friday at 4.21% almost unchanged from a month earlier.<\/p>\n
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\u201cEmerging markets are well positioned,\u201d said Eric Fine, head of active emerging markets debt at VanEck in New York. \u201cThey are generally sound credits with independent central banks that have already navigated crises.\u201d<\/p>\n
\u201cEMs broadly would be winners, as they represent alternative reserve assets,\u201d he said.<\/p>\n<\/p>\n
That\u2019s not to say there aren\u2019t some pockets of risk. Analysts say some emerging nations are more vulnerable than others because of widening fiscal deficits.<\/p>\n
\u201cLiquidity can deteriorate much faster than economic fundamentals,\u201d as markets could suddenly only care about fiscal vulnerabilities and nothing else, said Lyndon Man, co-lead of Invesco Global Investment Grade Credit in London.<\/p>\n
Brazil remains a key market to watch, with the challenge for investors being whether \u201cimproving sentiment following recent political developments is ultimately matched by credible fiscal implementation,\u201d he said.<\/p>\n
Brazil\u2019s nominal fiscal deficit has risen to nearly 10% of gross domestic product, while public debt has soared above 80%, making investors increasingly jittery. Still, Brazilian assets rallied last week after more market-friendly Fl\u00e1vio Bolsonaro surged to a lead over Luiz In\u00e1cio Lula da Silva in the first round of the presidential election.<\/p>\n
Currencies and bonds from Central and Eastern European economies also appear potentially at risk, according to Macro Hive Ltd., a global macroeconomic research and investment analysis firm.<\/p>\n
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\u201cCEE member countries of the EU would be the most vulnerable in emerging markets to any disruption within the Eurozone itself, given that their economies and monetary policies are so intertwined,\u201d said Simon Quijano-Evans, a senior emerging market strategist at Macro Hive in London.<\/p>\n
Poland in particular has seen recent fiscal pressure, with Moody\u2019s Ratings downgrading the nation\u2019s sovereign credit score by one notch to A3 in September.<\/p>\n
A further increase of 50 to 100 basis points in developed-market borrowing costs could make financing more difficult for emerging economies, particularly those with large fiscal or current-account deficits, said Jeff Grills, head of US cross markets and emerging-market debt at Aegon Asset Management.<\/p>\n
Others in the market see any selloff in EM assets due to a European debt crisis as an opportunity to boost their holdings.<\/p>\n
The 2011 debt crisis \u201cended up being a massive buy opportunity,\u201d said Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Investments in London. This time, emerging-market debt should be less sensitive to European government bond yields, he said.<\/p>\n
Aberdeen is taking shelter from a possible European crisis by favouring local-currency bonds in frontier markets such as Nigeria, Egypt and Kazakhstan, as the securities are \u201cnot correlated to broader developed bond markets,\u201d he said.<\/p>\n
What to Watch<\/p>\n
China, India, Czech Republic, Argentina and Poland will all release inflation data, which may reveal the impact of rising energy prices
\nMalaysia will publish third-quarter gross domestic product, which may show the continued support from the AI theme as the nation is a data center hub
\nChina will release September trade figures on Wednesday, with signs of a robust trade surplus to support more bullish views over the yuan<\/p>\n
\u00a9 2026 Bloomberg<\/p>\n
#Emerging #markets #armed #renewed #Europe #debt #fears<\/p>\n","protected":false},"excerpt":{"rendered":"
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