September 2021 Emerging Markets Debt Update & Outlook
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September 2021 Emerging Markets Debt
Update & Outlook
2021 Market Review rates. While a sustained inflation acceleration is
a risk, and one we have modeled in our outlook
The economic recovery that began during the scenarios, we assign a low probability to this scenario
second half of 2020 continued through August of and believe another market repricing because of this
2021 and had a positive effect on most risk assets. would likely be an opportunity to add to risk.
As we discussed in our January 2021 outlook, we
expect this recovery to extend well beyond 2021 Our baseline outlook foresees a gradual increase
and is likely to result in higher prices for risk assets. in US rates which would take the yield on the 10-
year US Treasury to between 1.50% - 1.75% in 12
As we move through late summer of 2021 and into months. Our outlook also assumes that consistent
2022, we expect the vaccine-led recovery and fiscal and proactive Fed communications and more
and monetary stimulus to continue with more rapid experience with tapering of quantitative easing (QE)
growth in countries that had previously lagged the should help avoid large market surprises. While we
United States. We expect countries from the Euro- recognize the risk of a more rapid and disruptive
zone, parts of Asia, and many emerging markets to repricing if inflation pressures fail to dissipate, we
lead this rebound. While there will continue to be expect the market will continue to focus on the
uncertainty surrounding the economic impact of the fundamental underpinnings of stronger economic
Delta variant, this should have a positive effect on growth as the recovery continues. As a result, we
risk assets – namely currencies and commodities – as remain bullish on EM credit.
global growth becomes more universal.
Our 12-month economic forecast that was detailed
The sharp increase in US Treasury yields earlier in our 2021 Emerging Markets Debt outlook
this year that was fueled by the strong economic published in January, is largely on track; and while
recovery, substantial policy stimulus, and upside we have made some modest adjustments, we remain
inflation surprises, evoke memories of the 2013 comfortable with the trajectory we outlined at the
“taper tantrum,” which triggered sustained beginning of this year.
underperformance of risk assets. While US rates
have partially retraced recently, markets still fear Our mid-January 2021 expected spread tightening
the potential impact on risk assets of another rapid in hard currency emerging markets debt (EMD),
repricing in US rates. which we forecasted to be 43 basis points (bps) over
12 months, is only 4 bps tighter through July. The
We expect the US Federal Reserve (Fed) and high yield portion of the market, which we expected
other developed market central banks to remain would outperform the investment grade segment,
accommodative and will look through core inflation has tightened 43 bps, but is only half way to our 83
increases, and thus are not as concerned that the bps forecast target. Interestingly, the investment
well-telegraphed taper will lead to a rapid rise in grade portion of the market, which we forecast to
only tighten a modest 7 bps, actually widened by 2
basis points through July. As we will detail in the
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 1
hard currency segment, we expect more of the Many of the countries that should directly benefit
market’s outperformance to continue to come from are located within the emerging markets, in our
the non-investment grade portion of the market. view. We anticipate this will have a positive impact
on credit spreads and foreign exchange relative to
Our January 2021, 12-month forecast for emerging the USD for these countries. We still need to get
market corporate debt also envisioned spread through this latest Covid variant scare, and the fear
tightening led by the high yield segment of the the Fed will deviate from their well publicized taper
market. So far, this has proven to be correct. We script, but we believe these factors will subside in
expected high yield (HY) spreads to tighten 49 bps relatively short order.
over 12 months and investment grade (IG) spreads
to tighten only 8 bps. HY spreads which are 23 basis Developed Markets Backdrop
points tighter through July, are still only halfway
to our forecast, while IG spreads which are only 5 We anticipate aggregate developed markets
bps tighter are near our forecast. As we outline in growth to remain strong over the remainder
the corporate debt segment later in the outlook of 2021. We expect, however, that the growth
section, and similar to the hard currency sovereign impetus will shift away from the US—first toward the
outlook, we continue to expect most of the future Eurozone and then toward developed Asia. For EM,
returns to continue to come from the high yield the overall robust growth will matter more than the
portion of the market. composition.
In contrast to our hard currency sovereign and Over the first half of this year, the US economy grew
corporate debt return expectations, our local rapidly at about a 6.5% annual rate. That was by far
currency forecast has thus far been mixed. The the fastest two quarter interval in the past 15 years,
market either has a lot of catching up to do or our and no stretch matches that rate since the early
expectations need to be adjusted. Our view is it is 1980s. The two factors we identified in our early year
more of the former and much less the latter. outlook—vaccinations and fiscal stimulus—drove
US growth. Vaccinations allowed substantial sectors
Within the foreign exchange market, in January we of the economy, e.g., restaurants, to rebound. And,
forecast a 12-month return of 4.2% for spot EM FX as as Figure 1 illustrates, substantial fiscal stimulus was
we expected the USD to weaken. As measured by deployed over Q1 and Q2. That stimulus helped to
the US Dollar Index (DXY), however, the USD is up support consumption and maintain rapid growth.
2.5% year-to-date, while EM FX is down 2.7% year-to-
date.
Figure 1: Substantial Government Fiscal Stimulus Deployed in
First-Half 2021
We believe a lot of the USD strength, having taken
place during the sharp move higher in US rates 9,000
earlier this year, was due to the expectation that
the reflation and recovery trade was mostly a US 8,000
occurrence. While it may have appeared like that to
some as the vaccination supply and rollout in the US 7,000
advanced more significantly than in other countries,
we believe this is a temporary phenomenon. We 6,000
expect the recent USD strength to reverse as
5,000
vaccine availability increases globally, most other
countries accelerate their rollout, and the early US 4,000
growth recovery transitions to other countries.
3,000
As we detail in the following pages, the underlying
fundamental global growth outlook is quite strong. 2,000
This should have a positive effect on the economic Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
and fiscal performance of countries that stand to Government Social Benefits to Persons (SAAR, Bil.$)
benefit from the increase in global demand. Government Social Benefits to Persons (SAAR, 3 MMA, Bil.$)
As of 30 June 2021
Source: Bureau of Economic Analysis, Haver Analytics
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 2
However, as we look forward, with most fiscal Despite the slower US growth, activity across
stimulus already deployed, the growth impetus is developed markets should continue to grow rapidly
slowing in the US and we have likely seen the peak as other developed market economies follow the
in US growth rates. Another substantial round of US’s vaccination-led rebound, though without the
stimulus appears unlikely as Congress has moved extra boost from very substantial fiscal stimulus.
on to other areas, such as infrastructure, and the
Biden administration is not pushing for additional Figures 3 and 4 show that, after a lethargic start,
short-term stimulus. Indeed, the fiscal drag should vaccinations have picked up rapidly in Europe and
intensify a bit more into the fall as extended and Japan. The number of vaccinated individuals as a
expanded unemployment insurance benefits expire share of the population will catch up and likely pass
in early September. On the vaccine recovery side US levels as the pace of vaccination has remained
of the economy, while most of the US rebound high. We expect this will have a positive effect on
has also already been realized, select areas of future growth, particularly in Europe, where we see
the economy have further room to recover. For considerable room for expansion.
instance, in Q2, consumers spent US$1,028 billion Figure 3: Europe’s Vaccinations Have Picked Up
on food service and accommodation, slightly more
70
than the US$1,020 billion in Q4 2019, and a sharp
increase from the US$826 billion spent in Q4 2020.
60
While further increase in spending between now
and the end of Q4 is a reasonable expectation, it is
50
unlikely to come close to US$200 billion increases in
spending over the prior two quarters. Signs of that 40
slower growth have started to appear in the data, as
shown in the regional service sector PMIs in Figure 2. 30
Figure 2: The Fed’s Regional Services PMIs Show Signs of 20
Slowing Growth
10
Early Reporting Fed Regional Services PMIs
80
60 0
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21
40
US EU JAPAN ISRAEL
20 As of 31 July 2021
Source: Bloomberg, Stone Harbor Investment Partners LP Calculations
0
-20
Figure 4: New Vaccinations Have Caught Up to the US
-40 1.4
-60
New Vaccinations Per Day Per 100 Population
1.2
-80
-100 1.0
-120
0.8
Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
Philly Fed Services PMI NY Fed Services PMI
Richmond Fed Services PMI Average: Early Regional Fed Serv PMIs 0.6
As of 31 July 2021
Source: Federal Reserve Board, Haver Analytics
0.4
What is important, however, is that slower does not 0.2
mean slow. Even with less impetus to US growth,
we still expect growth to be substantially faster than 0.0
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21
potential, which will help to further close the output
gap in the US. US, 7-Day Average EU, 7-Day Average Japan, 7-Day Average
As of 31 July 2021
Source: Bloomberg, Stone Harbor Investment Partners LP Calculations
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 3
As shown in Figure 5, the current level of output, Turning to Asia, as shown in Figures 3 and 4, on
relative to the pre-pandemic level, is substantially the prior page, Japan’s vaccinations have followed
below the US, which implies more room for catch- Europe’s upward trend with a lag over the last several
up. Signs of that catch-up have started to show up months. The overall share of the population of fully
in the data. For instance, the Markit services PMI vaccinated remains lower, but is likely to continue to
for Europe has moved notably higher over the last move higher over the next several months and we
several months and, in July, equaled the US (Figure expect economic activity to follow. Similar dynamics
6). should start to emerge in other Asian and Pacific
developed markets, and growth should accelerate
Figure 5: Europe’s GDP is Substantially Below the US over the remainder of the year.
105
Even as robust growth continues, we expect rates
100
to remain pegged to their respective lower bounds
across developed economies. The most important
policy change in the second half of the year looks
95
to be the Fed starting to taper the pace of asset
purchases; we expect a taper to be implemented
90 late this year or early in 2022, though the timing
remains dependent on economic outcomes.
85
In assessing Fed policy, perhaps the most important
80 variable that could shift both taper policy and rate
policy is core inflation in the US. Core CPI inflation
has surprised meaningfully to the upside, with
75
Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Q1 22 Q2 22 average month-over-month gains of 0.85%. Those
US GDP Japan GDP Euro Area GDP gains have pushed year-over-year core inflation up to
As of 31 June 2021 4.45%.
Source: CAO, BEA, EUROSTAT, Haver Analytics
GDP Indexed to 2019
In assessing the durability of this acceleration
in core inflation—crucial for thinking about its
Figure 6: Markit Services PMI for Europe Equals That of the
US impact on policy—examining the composition of
the acceleration is helpful. Figure 7 does so by
80 pulling out two categories that comprise most of
the acceleration. The first is pandemic-hit prices—
70
airfares and intercity transport, hotels/motels and
60 event admissions—which dipped substantially
during the pandemic but have recently rebounded.
50 The second is auto-related prices, where supply
chain and other issues have caused prices to surge,
40
especially for used cars. These areas accounted
30
for the vast majority of the inflation acceleration
over Q2. The pandemic-sensitive prices have now
20 retraced most of the ground they lost over the
pandemic, and look less likely to contribute as
10 much going forward. On the autos side, April, May
and June all saw very large gains, but in July, the
0
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 gains moderated and contributed only modestly to
US PMI Euro China
CPI. The prices of used cars at auction have also
As of 31 July 2021
stabilized recently. As these tend to lead used car
Source: Bloomberg prices in the CPI, it looks likely that the Q2 surge will
not be replicated in the second half.
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 4
Figure 7: Core CPI Inflation Surprised Meaningfully Higher In contrast, apart from a brief dip, the ECI has held
1.00 up and compensation over the last year rose at a
Non Auto/Pandemic pace essentially the same as in 2019. Along with
Core CPI
0.80 realized inflation, the ECI is a key metric we are
Pandemic CPI
Categories watching over the remainder of the year.
0.60
Emerging Markets Backdrop
Auto Related CPI
Categories
0.40
0.20
We see the global growth liftoff transitioning from
developed economies to emerging markets in the
0.00 months ahead and anticipate above-trend growth
in many EM economies. EMs are unlikely to expand
-0.20 at the exceptionally strong pace delivered year-
over-year in H1 2021, which reflected base effect
-0.40 comparisons with weak growth in 2020, but will likely
grow at elevated levels in the year ahead, in our
-0.60
view. Easier financial conditions in advanced and
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Aug-19
Sep-19
Jul-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Aug-20
Sep-20
Jul-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
developing economies remain highly supportive
As of 31 July 2021 for EM growth. With the exception of China, where
Source: Bureau of Labor Statistics, Stone Harbor Investment Partners LP
Calculations
authorities have deliberately curbed select asset
prices, EM financial conditions have remained
More broadly, sustained and lasting increases in unchanged this year despite monetary policy
inflation generally need wages to also rise rapidly. tightening in several countries (Figure 9).
As shown in Figure 8, the Employment Cost Index
(ECI, our preferred measure of labor costs as it
corrects for compositional changes) jumped in Q1 Figure 9: Easier Financial Conditions in Emerging Markets
but settled back down in Q2. Over the past year, it Financial Conditions
increased by 3%, a pace that doesn’t pose significant Standard Deviations From the Mean
5
inflationary risks. Though wages are not taking off to GS US Financial Conditions Index
the upside, the current situation is very different than 4
GS China Financial Conditions Index
in the aftermath of the last recession, when the ECI 3
EM Average
moved down sharply and remained low for years.
2
Figure 8: Employment Cost Index Accelerated 1
4.50 0
4.00 -1
Easier Financial
3.50 -2
Conditions
3.00 -3
2.50 -4
Oct-06
Jun-07
Feb-08
Oct-08
Jun-09
Feb-10
Oct-10
Jun-11
Feb-12
Oct-12
Jun-13
Feb-14
Oct-14
Jun-15
Feb-16
Oct-16
Jun-17
Feb-18
Oct-18
Jun-19
Feb-20
Oct-20
Jun-21
2.00
As of 30 June 2021
1.50 Source: Goldman Sachs, Stone Harbor Investment Partners
1.00
0.50
0.00
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Employment Cost Index: Compensation, % Change Year to Year
Employment Cost Index: Compensation, % Change Annual Rate
As of 30 June 2021
Source: Bureau of Labor Statistics, Haver Analytics
December 2005 = 100
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 5
High frequency data already point to improving consensus growth expectations, which have changed
GDP growth rates in Latin America, aided by strong only on the margin since June 2020, will shift higher
recent outturns in Brazil and Mexico, the product based on continued improvements in vaccination
of record-high terms of trade in Brazil and positive trends and economic activity in many EMs.
spillovers in Mexico from the improved outlook
for the US. Similarly, robust activity is occurring in Figure 11: Consensus Growth Outlook
many countries from the Middle East and Central %
EM GDP Growth
Europe. Asia remains the one region most affected 10
8 7.7 6.9
by a resurgence of the pandemic and the expected
6 4.9 4.9 5.4 5.1
slow recovery in confidence from that setback. And 4.0
4
yet, while the IMF downgraded its 2021 GDP growth
2
forecast for the region in its July update of the World 0 EM
Economic Outlook (WEO), the largest impact on -2 SHIP Forecast
BBG Consensus Forecast -1.9
the forecast comes from India, which is expected to -4
grow by 9.5% rather than 12.5%, in real terms this 2015 2016 2017 2018 2019 2020 2021
Bloomberg Consensus Forecast: 2021 GDP
year. We map our expectations for growth across %
8
the EM universe in Figure 10.
6
Figure 10: EM Growth Outlook
2020 2021 2022 4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
GDP growth (y/y) 2
EM Total -2.0% -7.3% -0.9% 1.9% 7.6% 14.2% 6.7% 4.3% 4.5% 5.1% 4.8% 4.6% EM G3
EM ex-China 1.3% -14.3% -4.7% -1.2% 0.5% 18.5% 7.0% 4.1% 3.9% 4.9% 4.4% 4.2% 0
BRICs -3.3% -5.1% 0.6% 3.8% 11.3% 14.1% 7.1% 4.2% 4.8% 5.7% 5.3% 5.1% Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21
EM ex-BRICs 0.8% -11.4% -3.7% -1.9% 0.2% 14.0% 5.5% 4.4% 3.9% 3.8% 3.6% 3.5%
As of 31 July 2021
EM ex-BRC 1.4% -15.4% -4.9% -1.1% 0.6% 20.1% 7.3% 4.2% 4.0% 5.3% 4.7% 4.5%
Source: Bloomberg, Haver, Stone Harbor Investment Partners LP
Latam -1.2% -15.8% -7.0% -2.7% -0.1% 17.8% 7.1% 3.8% 2.9% 3.1% 2.8% 2.8%
The information above contains forecasts. For illustrative purposes only.
Argentina -4.8% -20.0% -10.2% -4.6% 2.2% 22.2% 9.3% 5.2% 3.0% 2.7% 2.0% 2.0%
Brazil -0.3% -10.9% -3.9% -1.1% 1.0% 13.1% 5.8% 3.1% 2.5% 2.6% 2.5% 2.5%
Chile 0.2% -14.2% -9.0% 0.0% 0.3% 16.4% 11.3% 5.5% 3.1% 3.5% 3.5% 3.4%
Colombia 0.0% -15.5% -8.2% -3.4% 2.0% 18.6% 9.6% 4.2% 2.2% 3.9% 3.5% 3.5% The ability of EM countries to vaccinate their
Mexico
Peru
-1.3%
-3.6%
-18.7%
-29.9%
-8.7%
-8.6%
-4.5%
-2.2%
-3.6%
3.6%
18.1%
41.5%
6.1%
8.5%
3.6%
4.5%
3.6%
3.4%
3.4%
3.7%
3.1%
3.6%
3.0%
3.5%
populations influences authorities’ policies for
EMEA 2.1% -9.6% -1.2% -0.1% 0.9% 13.3% 4.6% 4.0% 3.7% 3.5% 3.4% 3.3% mobility restrictions and other constraints with
Czech -1.5% -10.9% -5.4% -5.3% -2.4% 9.0% 3.1% 3.4% 4.7% 3.9% 3.7% 3.5%
Hungary 2.1% -13.3% -4.6% -3.5% -2.1% 16.2% 7.0% 5.1% 4.0% 3.9% 3.7% 3.6% strong spillover effects on domestic activity. In
Poland 1.9% -7.9% -2.1% -2.8% -1.5% 9.7% 3.3% 4.9% 4.6% 4.0% 3.5% 3.2%
Romania 2.4% -10.0% -5.6% -1.4% -0.2% 14.6% 9.9% 6.1% 4.1% 4.1% 4.0% 4.0%
general, countries that have avoided full lockdowns
Russia
South Africa
1.4%
0.4%
-7.8%
-17.8%
-3.5%
-6.2%
-1.8%
-4.2%
-0.7%
-3.2%
9.2%
17.7%
4.2%
4.4%
3.7%
3.7%
3.7%
3.2%
3.6%
3.0%
3.5%
2.7%
3.4%
2.6%
have experienced stronger growth recoveries than
Turkey 4.5% -10.3% 6.3% 5.9% 7.0% 20.8% 5.0% 4.0% 3.0% 3.0% 3.0% 3.0% those that have severely limited travel and social
Ukraine -1.2% -10.8% -3.0% -1.1% -1.1% 9.9% 2.3% 2.5% 4.6% 3.7% 3.6% 3.4%
Emerging Asia -3.1% -5.0% 0.4% 3.3% 10.8% 13.7% 7.2% 4.5% 5.1% 5.9% 5.5% 5.3% gatherings. Accordingly, uncertainty over the pace
Asia ex-China
China
2.0%
-6.8%
-16.3%
3.2%
-5.7%
4.9%
-1.2%
6.5%
0.5%
18.3%
21.7%
7.9%
8.3%
6.3%
4.4%
4.6%
4.4%
5.5%
6.6%
5.5%
5.8%
5.3%
5.5%
5.1%
of vaccine rollouts, we believe, remains a key factor
India 2.8% -24.5% -7.4% 0.6% 1.5% 33.5% 11.3% 3.9% 4.0% 8.5% 7.1% 6.5% in current risk premiums priced into EM assets.
Indonesia 3.0% -5.3% -3.5% -2.2% -0.7% 8.3% 6.6% 5.5% 5.6% 5.4% 5.2% 5.1%
Malaysia 0.7% -17.1% -2.7% -3.6% -0.4% 20.1% 3.7% 6.6% 5.0% 5.0% 5.0% 5.0%
Philippines -0.7% -17.0% -11.6% -8.3% -4.2% 14.4% 6.6% 4.6% 6.7% 6.2% 6.0% 6.0%
South Korea 1.5% -2.6% -1.0% -1.1% 1.9% 5.9% 4.4% 3.8% 2.7% 2.6% 2.5% 2.5% While South Africa, Russia, Peru and most of EM
Thailand -2.1% -12.1% -6.4% -4.2% -2.6% 9.2% 4.0% 4.0% 5.0% 4.6% 4.4% 4.2%
Asia (ex China) have lagged developed countries
G3 -1.3% -11.3% -3.6% -3.1% -0.4% 11.9% 4.6% 4.9% 5.1% 4.2% 2.6% 2.1% in delivering vaccines, Uruguay, Chile and Qatar,
US 0.3% -9.0% -2.8% -2.4% 0.6% 12.2% 5.8% 5.6% 4.6% 3.6% 2.6% 2.4%
EUR -3.2% -14.4% -4.0% -4.6% -1.3% 12.8% 3.3% 5.2% 6.3% 5.6% 3.0% 2.1% among others, have already vaccinated a larger
Japan -2.2% -10.2% -5.5% -1.0% -1.5% 7.8% 3.7% 1.5% 3.0% 2.6% 1.6% 1.4%
share of their populations than either the US or the
As of 31 July 2021
Source: Bloomberg, IMF WEO, Haver Analytics, Stone Harbor Investment Partners UK. Many other EMs, including Argentina, Brazil,
LP
IInformation above contains forecasts
Ecuador, Malaysia, Sri Lanka and Mexico, have
rapidly increased the pace of inoculation (see Figure
We have maintained our above-consensus 7.7% 12). In addition, the Group of Seven (G7) countries
real GDP growth rate forecast in 2021 for EM recently agreed to provide up to 500 million doses
economies, and have observed the consensus GDP to EM countries this year. As demand for vaccines
growth forecast slowly drift higher from 6.6% at in advanced countries plateaus, we believe that
the start of the year to 6.9% as of June 30th (Figure the bottleneck in supply will ease and the pace
11). Uneven trends in COVID-19 infection rates and of vaccination will continue accelerating for the
uncertainty over progress in vaccination among remainder of the year, further enhancing EM growth
the various EM countries, we believe, continue to prospects.
dampen the outlook for many forecasts. We expect
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 6
Figure 12: Vaccination Progress among many oil producing EM economies,
%
80
Share of Population With at Least 1 Dose of Covid-19 Vaccine particularly as oil prices continue to strengthen, as
Uruguay: 73.5%
Chile: 72.0%
we expect. According to the IMF’s WEO, oil prices
70 Qatar: 69.9% are expected to rise nearly 60% above their low base
United Kingdom: 68.7%
United States: 56.5%
from 2020, implying an average price per barrel of
60 Argentina: 53.3% Brent crude of $67, a conservative estimate, in our
Brazil: 47.8%
view.
Ecuador: 44.4%
50 Malaysia: 38.6%
Sri Lanka: 36.6% Figure 13: Fiscal Improvement Among Many EMs
Mexico: 33.4%
40 5 Year Fiscal
Region Balance Average 2021 E Difference
30 Oil Producers1 -3.95% -3.36% 0.60%
Middle East -5.84% -5.38% 0.46%
Latin America -5.81% -5.66% 0.15%
20
EM Europe -2.17% -3.51% -1.35%
EM Asia exChina -5.20% -7.79% -2.59%
10 China -5.98% -9.60% -3.62%
United States -7.18% -15.03% -7.86%
0 As of 30 April 2021
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Source: IMF WEO, Stone Harbor Investment Partners LP
1
Select oil producers chosen by 20 largest oil rents. Fiscal balances are weighted
As of 31 July 2021
by nominal GDP.
Source: Stone Harbor Investment Partners LP, Our World In Data (https://github.
The information above contains forecasts. Aggregates are weighted by nominal
com/owid/covid-19-data/tree/master/public/data)
GDP.
Improving growth enables EM governments to The IMF’s general allocation of Special Drawing
manage the opposing needs of pandemic spending Rights (SDR) equivalent to US$650 billion will
and fiscal adjustment. Revenue from commodity further buttress EM countries efforts to meet
price increases supports government efforts for fiscal essential health and social spending needs,
consolidation, particularly for commodity producers fulfill external borrowing obligations and seek
in the energy sector. Fiscal balances of several oil opportunities to reduce unnecessary government
producing countries among the Gulf States and in spending. A minimum of US$275 billion of the
Latin America have already improved to levels above total allocation will go to developing countries, with
their latest five year averages, while larger countries, additional funding for EMs likely as some SDRs may
including the US and China have maintained more be rechanneled from countries with strong external
aggressive fiscal policies (Figure 13). Looking positions to more vulnerable nations, further
forward, we see scope for further fiscal retrenchment boosting the impact of the IMF support (Figure 14).
Figure 14: IMF Support
FX Reserve Boost from $650bn SDR Allocation (% of Government Revenues)
40%
37%
37%
36%
35%
15%
10%
5%
0%
Papua…
Lebanon
Zambia
Suriname
Trinidad
Belize
Tajikistan
Jamaica
Nigeria
Ghana
Gabon
Barbados
Ivory Coast
Sri Lanka
Angola
Mozambique
Senegal
Bahrain
Namibia
Cameroon
Malaysia
Guatemala
Pakistan
Tunisia
Saudi Arabia
Armenia
Georgia
El Salvador
Costa Rica
Dominican Rep
Honduras
Panama
Kazakhstan
Uzbekistan
Peru
South Africa
Indonesia
Mexico
Jordan
Iraq
Ukraine
Kuwait
Chile
Belarus
Thailand
Serbia
Kenya
Hungary
Paraguay
Egypt
Philippines
Colombia
Morocco
Uruguay
UAE
Croatia
Azerbaijan
Brazil
India
Mongolia
Ethiopia
Russia
Romania
Argentina
Ecuador
Oman
South Korea
Bolivia
Turkey
Czech Republic
Vietnam
Poland
Qatar
China
As of 2 August 2021
Source: Bloomberg, Haver Analytics, IMF, Stone Harbor Investment Partners LP
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 7
On monetary policy, while major central banks are inflows, placing EM assets in a good position to
expected to leave policy rates unchanged through perform when the global reflation theme resumes
2022, some EMs, including Brazil, Hungary, Mexico, (Figure 16).
Russia and Turkey have begun normalizing monetary
policies to head off inflationary risks. More countries Figure 16: Current Account Balance
(EM Ex China 4Q Moving Average)
are expected to follow suit, sending positive signals
to the markets about central banks’ willingness to 1.5%
confront price pressures with countercyclical policies.
We believe these efforts further enhance growth 1.0%
potential for EM economies by supporting greater
capital inflows and insuring against destabilizing 0.5%
price increases.
0.0%
The ongoing strength in commodity prices, driven
by rising demand, has been positive for EM -0.5%
countries, particularly for commodity exporters.
While core inflation measures, which remove the
-1.0%
impact of rising energy and food prices, have
remained contained, commodity-related export
revenues for many EMs have sharply expanded. -1.5%
Accordingly, major exporters of oil and gas,
agricultural products and industrial metals, including -2.0%
2006 2008 2009 2010 2011 2013 2014 2015 2016 2018 2019 2020
Brazil, Colombia, Indonesia and Russia have seen As of 31 March 2021
large improvements in their terms of trade in the Source: Haver Analytics, Stone Harbor Investment Partners LP
past year as global trade volumes have increased
(Figure 15). EM USD Sovereign Debt – Outlook
Figure 15: Rising Terms of Trade
Through July of this year, the spread of the JP
Change in Terms of Trade Morgan EMBI Global Diversified (EMBIGD) is
40 basically flat at 354 bps. The investment grade
Brazil Colombia Russia Indonesia sector of the market widened by 7 bps to 160 bps
30
and the spread of the high yield portion of the
20 market tightened by 29 bps to 579 bps. The 31 bps
10
move higher in the yield of the 10yr US Treasury
bond led to negative performance for the market
0 overall as the EMBIGD declined 0.25%.
-10
Looking ahead for the remainder of the year, our
-20 USD sovereign debt outlook remains constructive
based on the improving fundamentals, continued
-30
global policy support, improving technicals and
-40 attractive valuations. Specifically, we see room for
25 bps of spread tightening, which would lead to
-50
a 12-month return of 6.5%, if US Treasury yields are
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
As of 31 July 2021
unchanged.
Source: Bloomberg, Stone Harbor Investment Partners LP
One of the key elements of our constructive view is
Finally, despite market fears of a taper tantrum in the technical aspect of reduced supply stemming
EM debt markets similar to the 2013 episode, if the from better fundamental growth, commodity prices,
US Federal Reserve begins to normalize monetary and fiscal adjustment. The IMF estimates that the
policy later this year or next, we believe EMs fiscal balances of emerging market countries will
are fundamentally better prepared today. Many improve by 2.1 percentage points in 2021 vs 2020.
emerging economies are now running current In addition, we estimate that 85% of the countries in
account surpluses with little reliance on net capital the EMBIGD will have lower fiscal balances in
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 8
2021 than last year. The IMF continues to expect the Through July, US HY returned 4.3% more than EM
trend of fiscal consolidation to continue into 2022. sovereigns. The recent performance difference make
Global policy makers remain broadly supportive of EM sovereign debt stand out as historically cheap as
the vast majority of emerging markets. As noted the spread of the EMBIGD ended July 15 bps higher
earlier, the recent approval by the IMF’s Board of than that of US HY (despite EM having an overall
Governors of a large increase in SDRs for member better credit rating) which is 102 bps wider than the
countries will have a meaningful impact on EM 5-year average. Given the improving fundamental
international reserves and help improve many picture, continued global policy support, lower
sovereign liquidity positions. expected issuance and attractive valuations, we see
room for EM spreads to tighten by 25 bps over the
The improvement in fiscal balances along with the next 12-months, and return 6.5% in an unchanged
SDR allocations reduces the amount of market US Treasury environment.
access required for EM Sovereigns. Indeed Morgan
Figure 18: The Spread Between EM and US HY Remains Very
Stanley estimates that EM Sovereign net issuance Wide
will decline by 29% in 2021 from a year ago. Thus
far in 2021 the pace of EM issuance has been robust bps 5 Year Spread Difference bps Relative
and many sovereigns have chosen to front-load their 150 100
issuance, especially recently as US Treasury yields 50
declined from the Q1 highs. Through the end of 50
0
July, EM sovereigns have issued US$120 billion of -50
-50
sovereign debt, which is approximately 70% of the -100
expected gross issuance for the year (Figure 17).
-150 -150
Figure 17: 2021 EM Sovereign Gross Issuance -200
-250
-250
200 EMBI GD - US HY -300
-350 average
180 -350
Average Differential: -79bps
160 -450 current
-400
1 year 3 year 5 year
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
140
120
As of 31 July 2021
100 Source: ICE BofAML, J.P. Morgan, Stone Harbor Investment Partners LP
80
60
40
20
0
Total IG HY/NR
YTD Remaining
As of 31 July 2021
Source: JP Morgan, Stone Harbor Investment Partners LP
Valuations
We believe that valuations for EM sovereign debt
remain attractive given the fundamental and
technical backdrop and especially so relative to
US credit. The 4 bps of widening of the EMBIGD
through July 31st, significantly underperformed the
53 bps of tightening in the US High Yield market.
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 9
Figure 19: The Spread Between EM HY and EM IG Remains Very Wide
bps JPM EMBI GD HY and IG Spread
1,400
EMBI GD HY EMBI GD IG EMBI GD
1,200
1,000
800
600
579
400
354
200
154
0
Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15 Jul-17 Jul-19 Jul-21
bps
JPM EMBI GD HY - JPM EMBI GD IG Spread
1,000
Differential Average Differential (309)
800
600
425
400
200
0
Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15 Jul-17 Jul-19 Jul-21
As of 31 July 2021
Sources: Bloomberg, J.P. Morgan, Stone Harbor Investment Partners LP
Benchmark: J.P. Morgan EMBI Global Diversified HY, J.P. Morgan EMBI Global Diversified IG
Please refer to endnotes for benchmark definitions. Past performance is not a guarantee of future results. For illustrative purposes only.
The moderate overall index returns belie the broader EM Local Currency Debt – Outlook
set of opportunities within the market. As we noted
in January, the spread between EM HY and EM We are also constructive on EM Local currency
IG remains very wide at 425 bps and is similar to debt on the back of fundamentals, ongoing global
levels during the worst of the 2008 financial crisis. policy support, as well as attractive valuations. We
The difference between HY and IG has narrowed currently forecast a 12 month total return of 8.4%
this year, but only by 35 bps (Figure 19). While many for the JP Morgan GBI EM Global Diversified over
IG credits have returned to pre-Covid spread levels, the next 12 months, comprising 3.2% from currency
this has not been the case for the vast majority of appreciation and 5.2% from carry plus duration.
EM HY credits. We find value and highlight several
HY credits (Angola, Argentina, Belarus, Colombia, We expect emerging market currencies (EMFX) to
and Pemex) as our top picks for the remainder of the outperform on a relative basis versus currencies
year. from developed countries and believe several
factors support our view. First, as shown in Figure
20, the historical relationship between commodity
strength and stronger EMFX has diverged in 2021,
the result of market concerns over the EM outlook.
We believe these concerns are misplaced and that
EM currencies will begin to outperform commodity
returns later this year, especially among commodity-
producing economies.
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 10Figure 20: EM FX Still Not Following The Large Move in In our view, two factors will provide strong
Commodity Prices
support for EM currencies going forward. First,
EM REER vs Real Commodity Price Index the depreciation of EM currencies following the
110 140
pandemic has improved the competitiveness of
130
EM economies, allowing for strong export results
105 and gains in current account balances. Second,
120 many EM central banks have already started to hike
100
policy interest rates, providing more attractive yields
110 relative to developed market economies, which are
likely to maintain exceptionally low policy interest
95 100
rates for the year ahead. See Figure 21.
90
90 The EM-DM policy rate difference declined sharply
80 in 2020 with the onset of the pandemic as EM central
85 banks cut rates, and coincided with significant
70 underperformance of EM currencies relative to G10
GBI-EM weighted REER
Real Commodity Price Index (RHS) FX since the end of 2019. As Figure 22 shows, this
80 60
underperformance was pronounced relative to the
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Euro. Today, EM central banks are re-establishing
As of 31 July 2021
Source: Stone Harbor Investment Partners LP
the EM yield advantage, a key support for EMFX.
In addition, EM currency valuations, adjusted for Figure 22: EMFX has Cheapened Since 2019
inflation, remain historically attractive. As shown EM FX EUR Returns Since 2019
in the green line on Figure 20, the average real Chinese Renminbi
Czech Koruna -0.23
1.97
effective exchange rate for EM currencies is roughly Philippine Peso -1.87
similar to its valuation in the late 1990’s and early Romanian Leu -2.87
2000’s when EM fundamentals were significantly Chilean Peso
Hungarian Forint
-3.20
-5.79
weaker than they are today. Polish Zloty -5.90
Malaysian Ringgit -6.76
South African Rand -7.33
Figure 21: Global Policy Rates Remain Supportive Indonesian Rupiah -9.57
Mexican Peso -10.23
9% Thai Baht -11.59
GBI-EM FX INDEX -11.61
EM Average EM Market Implied Rate
8% Dominican Republic Peso -12.01
Fed Fed Market Implied Rate Colombian Peso -17.41
7% Peruvian Sol -18.96
ECB ECB Market Implied Rate
Uruguayan Peso -19.01
6% Russian Ruble -19.86
Brazilian Real -23.31
5% Turkish Lira -35.37
-50 -40 -30 -20 -10 0 10
4%
As of 31 July 2021
Source: Bloomberg, Stone Harbor Investment Partners LP
3%
2%
Despite the prospect for a Fed taper, we expect
outperformance in EM rates over the next 12
1% months. We see four supportive factors for EM
0%
yields:
-1% 1. In contrast to 2013 when the Fed last tapered
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
QE, EM economies enter the current period with
As of 30 June 2021
Source: Haver Analytics, J.P. Morgan, Stone Harbor Investment Partners LP
stronger external conditions. As we have noted,
Benchmark: J.P. Morgan GBI-EM Global Diversified balanced current accounts and low currency
Information above contains forecasts based on implied forward rates. China,
Dominican Republic, Indonesia, and Peru are excluded from forecasts valuations sharply contrast with the same metrics
from the prior episode.
2. EM domestic bonds provide a significant yield
advantage over DM fixed income (Figure 23).
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 11Figure 23: Yields and Debt: EM vs. DM 4. Unlike in 2013, when foreign investor ownership
250
Debt/GDP in EM domestic bonds had neared its historical
peak, non-resident holdings have sharply
200 declined, lowering the risk of outflows (Figure
150
EM Average DM Average 25).
129%
100
Figure 25: Non-Resident Ownership Share of Local
Government Bonds
50 51% 31%
29%
0
UK US Euro Japan China Indonesia Russia Mexico Colombia South Brazil
Zone Africa
27%
5 Year Real Yields
4
25%
3 2.87%
23%
2
21%
1
19%
0
17%
-1
-2 -1.67% 15%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
-3
As of 30 April 2021
Source: Haver Analytics
-4
UK US Euro Zone Japan China Indonesia Russia Mexico Colombia South Africa Brazil
Weighted Average
As of 31 July 2021
Source: Bloomberg, Stone Harbor Investment Partners LP EM Corporate Debt – Outlook
3. The steepness of EM bond yield curves provides In January, we expected HY EM Corporate debt to
attractive yield carry and roll-down investment drive most of the performance in EM Corporates in
opportunities for investors in local currency debt 2021, based on our expectations for robust global
(Figure 24). growth and favorable terms of trade for many
commodity-producing countries and companies. So
Figure 24: 2-Year and 10-Year Rates in EM vs DM far this year, this prediction has been correct; the HY
% Emerging Markets vs Developed Market1
sector has outperformed IG assets, which also have
2.5
(10 Year–2 Year) generated positive total returns.
EM Average
We project the JP Morgan CEMBI Broad Diversified
2.0 DM Average
1.5 1.57%
(CEMBIBD) spread to tighten 8 bps over the next
1.0 12 months, an implied total return of approximately
0.50%
4.4% (assuming unchanged US Treasury yields). HY
0.5
bonds will drive performance of the index over this
0.0
period with an estimated carry and spread change
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
return of 6.3%, led by credits rated below BB. We
% Emerging Markets - Developed Market also envision smaller but positive returns from IG
1.6
EM - DM bonds. We also believe that EM corporate bonds,
1.2 Average Difference 0.62%
1.07% on average will outperform US HY debt.
0.8
High Yield
0.4
0.0
-0.4
After a volatile 2020, during which the CEMBIBD
-0.8
delivered higher returns with less volatility than the
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
ICE Bank of America US High Yield Constrained
As of 31 July 2021 index (HUC0), the first half of 2021 has seen US HY
Source: Bloomberg, Stone Harbor Investment Partners LP
1
EM average includes IDR, MYR, THB, PHP, CNY, ZAR, RUB, CZK, PLN, HUF, RON, outperform by a wide margin. US HY returns have
BRL, PEN, CLP, COP, MXN. DM average includes USD, JPY and DEM. MYR, ZAR,
HUF, PEN, COP are based on 10 year curve minus the 3 year curve
been bolstered by the significant positive
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 12performance of CCC-rated securities, which have Figure 27: EM Corporate IG vs US Corporate IG YTW
recovered nearly all of the spread widening from %
1.6
2020. Securities rated CCC are a much smaller EMCR IG YTW - US IG Corporates YTW
component of the CEMBIBD relative to HUC0 and 1.4
have been less a driver of year-to-date performance. 1.2
While spreads in all credit rating categories in both
indices are at the lower end of historical ranges, 1.0
single B-rated securities in EM corporates screen as 0.8
attractive versus US HY single B’s (Figure 26). EM 0.6
single B corporate bonds, are currently trading 40-50
bps wider than the historical norm to similarly rated 0.4
US HY debt. We expect this spread to narrow during 0.2
the second half of the year. 0.0
Figure 26: EM Corporate Single B vs US HY Single B YTW -0.2
2017 2018 2019 2020 2021
%
3.5 As of 31 July 2021
Relative Source: Bloomberg Barclays, Stone Harbor Investment Partners LP
Benchmark: J.P. Morgan CEMBI Broad Diversified, Bloomberg US Aggregate
3.0
Corporate
Average: 1.23%
2.5 Second, in most periods of rising U.S. Treasury yields
over the past 15 years, EM IG debt spreads have
2.0
tightened (Figure 28).
1.5
Figure 28: The Average Spread of EM IG Debt Tightened
1.0
During Rate Rises
0.5 Largest Trough-to-Peak Yield EM Corporate IG Spread Change
Increases Since 2009, 7yr US Treasury
0.0 Mar-09 - Jun-09 144
-274
Nov-10 - Feb-11 140 -52
-0.5
May-13 - Sep-13 139 47
2017 2018 2019 2020 2021
As of 31 July 2021 Sep-17 - Oct-18 131 -8
Source: Bloomberg Barclays, ICE BofAML, Stone Harbor Investment Partners LP Jul-16 - Dec-16 123 -48
Benchmark: J.P. Morgan CEMBI Broad Diversified, HUC0 ICE BofAML US High
Yield Constrained Aug-20 - Mar-21 106 -76
Nov-09 - Apr-10 76 -95
Investment Grade Jan-15 - Jun-15 75 -61
Sep-11 - Oct-11 59 -61
Oct-13 - Dec-13 57 -17
The prospect of higher US Treasury yields could
Jul-12 - Mar-13 54 -82
dampen investor’s appetite for EM IG corporate
Jan-12 - Mar-12 53 -62
bonds, especially those with longer duration.
Sep-19 - Nov-19 46 -21
However, two factors favor the performance of the
0 50 100 150 200 250 -300 -200 -100 0 100
sector. First, the premium of EM IG corporates over bps bps
US IG debt over time has been quite consistent. As of 30 June 2021
Source: Bloomberg, Stone Harbor Investment Partners LP
With the exception of a brief period of pandemic- Analysis done over 12 years looking at the largest trough to peak moves in US
induced volatility during the second quarter of 2020, treasury 7 year yields.
EM IG corporates have generally yielded between
50 bps and 80 bps over US IG debt. We believe this Chinese Investment Grade Corporates
carry advantage continues to favor EM.
Both Chinese fixed income and equity markets
declined in 2Q21 driven by regulatory enforcement
in industry sectors including the internet, financial
technology, education and healthcare. The tone
of recent meetings between Chinese government
officials and the US administration further
exacerbated the negative sentiment. Other
idiosyncratic issues impacting the fixed income
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 13sector included negative credit developments Conclusion
at Huarong Asset Management (delayed release
of financials) and Evergrande (rating agency In summary, we expect the global economic
downgrade). As a result, large sub-sectors of China’s recovery from the first half of this year to extend
bond market have underperformed in sympathy. well beyond 2021, accompanied by higher
Given the relatively large, diversified composition of prices for risk assets. The growth impetus for the
China in the EM IG Corporate benchmark, we expect remainder of the year will shift from the US to the
to see select opportunities for tactical positioning in Eurozone, parts of Asia, and many EMs, supported
Chinese corporates, particularly in the financials and by vaccine progress.
real estate sectors.
Given the constructive macroeconomic backdrop,
strong underlying fundamentals of many EMs, and
continued central bank policy support, we maintain a
bullish outlook on emerging markets debt.
Summary Observations and 2021 Portfolio Strategy and
Expectations Positioning
Based on our observations and expectations, the
• Global growth liftoff is transitioning from devel-
primary themes guiding our investment ideas across
oped economies to emerging markets
various EMD portfolios include the following:
• We expect the US Fed and other developed
market central banks to remain accommodative • Neutral duration
• We do not anticipate the US Fed taper will lead • Overweight HY vs IG
to a rapid rise in rates
• Overweight Latin America and Africa
• Some EMs have already begun normalizing
• Underweight Asia and Europe
monetary policies to proactively guard against
inflation risks • Overweight local vs hard currency
• Many EMs have rapidly increased the pace of in-
oculation over the recent months and we believe
this trend will continue, which should add further
fuel to the recovery currently underway
• Ongoing strength in commodity prices, driven by
rising demand, are supportive of EM countries
• We believe that valuations for EM hard currency
sovereign debt remains attractive given the fun-
damental and technical backdrop; and we expect
non-investment grade credits to outperform
investment grade credits
• We expect emerging market currencies to out-
perform on a relative basis versus currencies from
developed countries
• We also expect high yield EM corporate debt to
outperform US high yield debt on a relative risk/
reward basis, supported by favorable terms of
trade
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 142021 Investment Opportunities Highlights
Below are characteristics of our representative portfolios positioning across these EMD sectors:
Yield (%) Rating Notable Deviations
Strategy Portfolio Relative Portfolio Benchmark O/W U/W
Angola, Argentina, China, Chile,
EM Hard Currency Sovereign Debt 5.8 +1.6 BB BB+
Belarus, Colombia Philippines, Peru
IDR, MXN, RUB, HUF, MYR, RON,
EM Local Currency Sovereign Debt 5.5 +0.5 BBB+ BBB+
IDR Duration THB Duration
Brazil, Nigeria, Chile, Kuwait,
EM Corporate Debt 5.0 +1.3 BB- BB+
Ghana, Ukraine Philippines, Qatar
Brazil, Colombia, Thailand, Saudi
ESG 4.3 +0.5 BBB- BBB-
Uruguay Arabia, Malaysia
As of 16 August 2021
Source: Stone Harbor Investment Partners LP
You should not assume that any investments in regions identified or described were or will be profitable. The information in the table above regarding relative yields is
presented exclusively to demonstrate Stone Harbor’s current positioning across four EMD representative portfolios compared to representative benchmarks. The stated yield
is not intended to be, and is not, representative of total returns that an investor may receive or that any Stone Harbor has received. Portfolio yield does not account for gains
and losses from trading in positions, changes in the principal value of investments, defaults, currency fluctuations, portfolio management expenses, and other activities that
influence the total return to investors. The benchmarks used as the basis for relative yield and the credit rating comparisons are the J.P. Morgan CEMBI Broad Diversified, J.P.
Morgan EMBI Global (EMBIG), J.P. Morgan GBI-EM Global Diversified, J.P. Morgan ESG Blended. See endnotes for important disclosures, including additional disclosures
regarding benchmarks and performance.
Authored by:
Members of the Stone Harbor Investment Partners Emerging Markets Debt Team
Stone Harbor believes that a disciplined credit and relative value approach will best capture what the invest-
ment team views as a secular trend towards the expansion and development of the emerging debt markets.
The team also believes that investing in a diversified portfolio of improving emerging markets debt instruments
will result in strong, long-term performance, and that the team’s experience of more than 25 years, combined
with team-based analysis and portfolio management are superior to that of their competitors. Also, the key to
successfully generating excess returns is through a disciplined process of rigorous credit analysis combined
with a significant ongoing investment in people and technology.
Jim Kumaran Stuart
Craige, CFA Damodaran, PhD Sclater-Booth
Co-CIO Portfolio Manager Portfolio Manager
Head of Emerging Markets EMD Sovereign EMD Sovereign
New York London New York
Experience – 32 Years Experience – 20 Years Experience – 29 Years
William David Darin
Perry Oliver, CFA Batchman
Portfolio Manager, Global Corporate Portfolio Manager, EMD Portfolio Manager, EM
Co-Head ESG Committee Sovereign Corporate Latin America
New York New York New York
Experience – 36 Years Industry Experience – 34 Years Industry Experience – 23 Years
Steffen Seamus Mark
Reichold, PhD Smyth, PhD Weiller
Portfolio Manager, EMD Sovereign Developed Markets Economist Head of Product Management
Emerging Markets Economist New York New York
Co-Head ESG Committee Industry Experience – 14 Years Industry Experience – 29 Years
New York
Industry Experience – 18 Years
Stone Harbor Investment Partners September 2021 EMD Update & Outlook 15World Economic Outlook Database Assumptions and Data Conventions
The World Economic Outlook (WEO) database contains selected macroeconomic data series from the statistical appendix of the World
Economic Outlook report, which presents the IMF staff’s analysis and projections of economic developments at the global level, in major country
groups and in many individual countries. The WEO is released in April and September/October each year.
Assumptions
A number of assumptions have been adopted for the projections presented in the World Economic Outlook (WEO). It has been assumed that
real effective exchange rates remained constant at their average levels during July 24 to August 21, 2020, except for those for the currencies
participating in the European exchange rate mechanism II (ERM II), which are assumed to have remained constant in nominal terms relative
to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for
selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $41.69 a barrel in 2020 and $46.70 a barrel in
2021 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on US dollar
deposits will average 0.7 percent in 2020 and 0.4 percent in 2021; that the three-month euro deposit rate will average –0.4 percent in 2020
and –0.5 percent in 2021; and that the six-month Japanese yen deposit rate will yield, on average, 0.0 percent in 2020 and 2021. These are, of
course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be
involved in the projections. The estimates and projections are based on statistical information available through September 28, 2020
Data Conventions
Data and projections for 194 economies form the statistical basis of the WEO database. The data are maintained jointly by the IMF’s Research
Department and regional departments, with the latter regularly updating country projections based on consistent global assumptions.
Although national statistical agencies are the ultimate providers of historical data and definitions, international organizations are also involved
in statistical issues, with the objective of harmonizing methodologies for the compilation of national statistics, including analytical frameworks,
concepts, definitions, classifications, and valuation procedures used in the production of economic statistics. The WEO database reflects
information from both national source agencies and international organizations.
Most countries’ macroeconomic data presented in the WEO conform broadly to the 2008 version of the System of National Accounts (SNA).
The IMF’s sector statistical standards—the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6),
the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG), and the Government Finance Statistics Manual 2014 (GFSM
2014)—have been or are being aligned with the SNA 2008. These standards reflect the IMF’s special interest in countries’ external positions,
financial sector stability, and public sector fiscal positions. The process of adapting country data to the new standards begins in earnest when
the manuals are released. However, full concordance with the manuals is ultimately dependent on the provision by national statistical compilers
of revised country data; hence, the WEO estimates are only partially adapted to these manuals. Nonetheless, for many countries the impact, on
major balances and aggregates, of conversion to the updated standards will be small. Many other countries have partially adopted the latest
standards and will continue implementation over a period of years.
Note: Many countries are implementing the SNA 2008 or European System of National and Regional Accounts (ESA) 2010, and a few countries
use versions of the SNA older than that from 1993. A similar adoption pattern is expected for the BPM6 and GFSM 2014. Please refer to Table G
in the Statistical Appendix, which lists the statistical standards adhered to by each country.
The fiscal gross and net debt data reported in the WEO are drawn from official data sources and IMF staff estimates. While attempts are made
to align gross and net debt data with the definitions in the GFSM, as a result of data limitations or specific country circumstances, these data
can sometimes deviate from the formal definitions. Although every effort is made to ensure the WEO data are relevant and internationally
comparable, differences in both sectoral and instrument coverage mean that the data are not universally comparable. As more information
becomes available, changes in either data sources or instrument coverage can give rise to data revisions that can sometimes be substantial. For
clarification on the deviations in sectoral or instrument coverage, please refer to the metadata for the online WEO database.
The following conventions have been used throughout the WEO:
• Domestic economy series are expressed in billions of national currency units
• External accounts series are expressed in billions of U.S. dollars.
• “Billion” means a thousand million; “trillion” means a thousand billion.
• Missing data are indicated by “n/a”.
• Blank row means that data is not available or not applicable.
• “/” means between years or months (for example, 2017/18) to indicate a fiscal or financial year.
• Shading differences are used to distinguish historical results from IMF staff projections.
• Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
• Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix,
which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.
• For some countries, the figures for 2017 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the
Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and
balance of payments indicators for each country.
• As used here, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international
law and practice. The term also covers some territorial entities that are not states but for which statistical data are maintained on a separate
and independent basis.
• Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless noted
otherwise, country group composites represent calculations based on 90 percent or more of the weighted group data.
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