Brexit blip
The cautious stance and negative sentiment towards the asset class was short-lived and followed by a solid 5.9% return in June. The UK’s EU referendum vote was almost a non-event for the asset class, especially for hard currency sovereign debt, which lost only eight basis points on the days following the vote and returned 2% the next week.
The perception that Brexit would be an event with global implications and ensuing defensive positioning by investors saw local currency sovereign debt initially lose 2% following the vote.
However, the realisation that any implications of Brexit would be more relevant to Europe, and therefore contained from the rest of the world, meant local debt fully recovered the losses in the following week by returning 3.1%.
Trump card
The US election took centre stage in November and the rebound that had been uninterrupted until that point took a dent. Donald Trump’s victory as the next president of the US sent ripples through emerging markets following the result.
Local currency sovereign debt dropped by 7% and hard currency sovereign debt lost 4.1% in November alone. Within the local currency space, the big loser has been the Mexican peso.
The currency continued on a downtrend trend against the US dollar and had depreciated by 16.8% from the beginning of the
year until 20 November. The speculation about Donald Trump’s promises and his stance on foreign policy has sent the currency into a nosedive. The market’s expectation is that Trump’s fiscal policies will send US government bond yields higher, which could prove damaging for emerging economies as issuing debt in US dollars becomes increasingly expensive.
This could challenge the relative attractiveness of the asset class and investors’ notions of its long-term value. Having said that, there isn’t a great deal of clarity yet on the US president elect’s policies.
If anything, the November sell-off may have created opportunities for investors to reassess whether they can stomach the likely rocky path ahead and adjust their exposure to the asset class accordingly.
