Emerging markets fixed income funds recover without positive flows

Emerging markets indices recorded losses in 2022 but outperformed other fixed-income categories such as government and investment grade bonds, data has shown.

According to a Morningstar report on emerging markets fixed income funds, detailing their ongoing recovery from the 2022 selloff, the funds showed resilience amid economic challenges and geopolitical uncertainties.

From the start of 2022 through the first quarter of 2024, emerging markets and high yield indices have consistently outperformed government bond and investment grade corporate bond indexes.

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According to the report, the 2022 selloff led to sharp outflows from emerging-markets bonds due to recession fears and economic and geopolitical uncertainty. These outflows continued into 2023, with emerging markets bonds not experiencing the strong net inflows seen in other fixed-income market segments.
However, in the first quarter of 2024, the scale of net outflows decreased significantly, indicating a stabilisation of flows.

Within the global emerging-markets bond cohort, several funds stood out. MFS Meridian Funds—Emerging Markets Debt, which holds a Morningstar Medalist Rating of Silver, returned 0.52% in the first quarter, outperforming its peers by 0.81%. Vontobel Fund—Emerging Markets Debt, rated Neutral, achieved a 3.67% return, outperforming its peers by nearly 4%. Conversely, Barings Emerging Markets Sovereign Debt, also rated Silver, declined by 1.04%, underperforming peers but outperforming its category index by 1.57%.
In the local currency category, Barings Emerging Markets Local Debt had a challenging start to 2024, declining by 5.40%, underperforming its peers and category index. Despite this, the fund had outperformed both comparators in 2023.

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Evangelia Gkeka, senior manager research analyst at Morningstar and author of the report, commented: “Most managers expect emerging markets to achieve stronger growth than developed markets in the near to medium term, but growth diverges from region to region. Despite slowdown concerns surrounding China, Asia remains the main growth engine.

The Eastern European outlook is mixed due to the ongoing war in Ukraine, she added. In Latin America, while there’s significant country-to-country divergence, the overall outlook is positive. Latin America and Asia have managed inflation better than Eastern Europe, but recent geopolitical tensions and higher commodity prices could raise near-term inflation in emerging markets, Gkeka added.

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