Q3 EM Debt Outlook

The sell-off in emerging-market debt is overdone, creating opportunities to add duration while selectively favoring vulnerable or mispriced credits and currencies.

• After the Fed rate hike, TT increased USD duration and local-duration exposure in Poland, Czech Republic, Brazil, Colombia and Mexico, expecting higher rates to weaken growth, reduce inflation fears and stabilize oil prices.
• The firm remains overweight Venezuela and Lebanon, although it has trimmed both positions, while staying underweight Ukraine and Argentina; Lebanon has continued to rally despite the reduced exposure.
• Selective opportunities remain in distressed Chinese credit and Ukrainian corporates, whose improved cash flows and controlled liquidity profiles are not reflected in market pricing of restructuring risk.
• TT reduced FX overweights in KRW, JPY and HUF after strong returns, then rebuilt FX exposure toward the end of September as volatility increased; it also shifted frontier-market exposure from some African markets toward Asia, including Pakistan, where foreign participation is around 1%.
• In local rates, the firm rebuilt large receiver positions in Poland and Czech Republic and retained payer positions in HUF, CNY and THB; after a research trip to São Paulo, it increased its Brazilian receiver position, while adding Colombian and Mexican duration as local yields rose with US Treasury yields.

Takeaway: TT favors duration and selective EM debt risk, with receiver positions in Poland, Czech Republic, Brazil, Colombia and Mexico, but expects volatility and continues to avoid Ukraine, Argentina and complacent parts of the African frontier market.