In Lackluster Year for Emerging Markets, Riskiest Bonds Shone

(Bloomberg) -- Dollar bonds from some of the world’s weakest economies have emerged as the bright spot in what’s otherwise been yet another lackluster year for emerging-market assets.

While many emerging assets are ending the year with gains, their returns pale in comparison with those on Wall Street. Among currencies tracked by Bloomberg, just three from the developing world have managed to strengthen in the face of a rising US dollar.

MSCI’s index of EM stocks has notched a 5% return — its second straight year of gains — but that compares with a 17% gain on global equities and 20%-plus on the S&P 500 Index. Investors in EM local-currency debt, meanwhile, have seen an average 2.1% return.

Emerging-market equities and local-currency bonds “underperform their US peers by default whenever the US dollar strengthens,” said Simon Quijano-Evans, chief strategist at Gramercy Ltd. in London. He said the asset class’s performance next year hinges now on President-elect Donald Trump’s policies, “and what they mean for the US dollar.”

Equities outperformed in Argentina, Pakistan, Sri Lanka and Kenya, while China’s stock index rose almost 15%, its best annual advance since 2020, thanks to Beijing’s stimulus efforts.

Bloomberg’s gauge of EM high-yield dollar bonds was the top performing asset in emerging-markets with a a 15% gain year to date, and is set for its best year since 2016.

Countries such as Argentina and Ghana benefited from economic reforms, with some Argentine dollar bonds notching gains of over 100%. Others, like Ukraine, gained as investors grew more hopeful that a Trump presidency could end its war with Russia. Some recently restructured Ukrainian bonds gained more than 45% since September.

Such markets far outperformed EM investment-grade debt which returned a meager 1.7% while the broader index of EM debt handed investors a 6.5% gain.

Carlos de Sousa, an emerging market debt portfolio manager at Vontobel Asset Management, is skeptical the high-yield rally can sustain this year’s pace, and said that country and credit selection will be key from here.

“We’re a lot more diversified than usual at the moment, as many of our favorite bets did play out in 2024,” he added.

Meanwhile, a 7.7% gain in Bloomberg’s dollar index kept EM currencies under pressure, with an MSCI gauge set to end the year in the red. Only the Malaysian ringgit, Hong Kong dollar, Thai baht have managed to strengthen this year.