How the 2020 Election Could Affect Emerging Market Debt | Lord Abbett
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Economic Insights

Valuations suggest that recovery of EM debt markets could continue, but support for globalization is in the balance.

Read time: 3 minutes

While the election in November could result in significant shifts in domestic policy, other countries are paying close attention to likely impacts on them as well. Changes in economic, environmental and foreign policy could have important effects on other economies and on overseas investments, including those of emerging markets.

A win by President Trump is likely to mean that foreign policy moves would continue to be unpredictable and to diverge from those of the previous administrations. Trade relations are likely to continue to dominate headlines, and tensions with China are unlikely to abate. On the other hand, if Vice President Biden were to win, we would expect to see a pivot away from “America First” and toward rebuilding alliances and renewing support for globalization.

Bilateral versus Multi-lateral

While the Trump administration has favored bilateral agreements in trade and other areas, a Biden administration would take a more traditional multi-lateral approach. Biden would also be more supportive of multilateral institutions generally. This could take the form of an increase in allocations of Special Drawing Rights (SDRs) to the membership of the International Monetary Fund. Increased funding of SDRs would help alleviate budget pressures that have arisen as a result of COVID-19, and would be broadly supportive of emerging markets. This would increase stability in these markets, potentially attracting additional private sector investment.

Regional and Country Impacts

Asia: On the issues of trade, national security and human rights, both parties have become relatively hawkish on China. While we don’t expect a reduction in tariffs, a Biden administration would be likely to use more traditional approaches to diplomacy, thus removing the unpredictability (and headline risk) of the Trump administration. Biden would also be more likely to bring allies into trade talks and other negotiations.               

Russia: In the event of a Biden victory, a number of risks are likely. Areas of conflict with the U.S. could be brought to the forefront, including interference in the 2016 elections, the poisoning of Vladimir Putin opponent Alexei Navalny, and relations in the Middle East. Headline risk related to these issues is, therefore, likely to rise. In our opinion, the yield spreads on Russian corporate and sovereign bonds are not currently compensating investors for these risks.

Turkey: This relationship is complex, given the country’s NATO membership and its proximity to the Middle East. So, the likely impact of the election on its debt is uncertain. While President Trump and President Erdogan appear to have a good relationship, Turkey’s recent purchase of Russian missiles has complicated matters. This action was expected to result in sanctions, but Turkey’s status as a NATO ally has made this difficult.  While Trump is more likely to side with Erdogan, a Biden administration would be more supportive of NATO. Valuations on Turkish sovereign and corporate debt reflect the high degree of uncertainty in this market, and in our view, investors are being compensated for this heightened risk.   

Brazil: Given President Bolsonaro's rhetoric and strong ties to the Trump administration, a Biden win would likely be detrimental to diplomatic relations. Biden's administration could bring some friction to the relationship, as a renewed focus on environmental policies would increase attention on Amazon deforestation. In our view, the country’s sovereign debt is not adequately compensating investors for the possibility of the strains that could occur in the event of a Biden victory.

Mexico and Central America:  While Trump’s “NAFTA 2.0” agreement has eased relations with Mexico, a Biden win could result in further economic integration of supply chains. In addition, an easing of immigration restrictions, increased financial assistance and localization of the US firms could result in increased investments in both Mexico and Central America. Biden’s environmental agenda, however, might not be well-received, but going forward it is critical that trade agreements incorporate ESG factors.

Summing Up

While many other asset classes have recovered fully from the sell-offs that occurred at the height of the pandemic, the recovery in EM debt has been only partial. A multi-lateral approach could enhance stability in emerging markets generally, leading to an increase in capital flows and benefiting EM debt markets.

 

This article is being provided for informational purposes only and is intended to illustrate certain information analyzed during the research process. It does not constitute a recommendation nor investment advice and should not be used as the basis for any investment decision. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. Investing in international denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. The securities markets of emerging countries tend to be less liquid, especially subject to greater price volatility, have a smaller market capitalization, have less government regulation and may not be subject to as extensive and frequent accounting, financial and other reporting requirements as securities issued in more developed countries.

No investing strategy can overcome all market volatility or guarantee future results. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.  If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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