(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 developing-world assets ended the year with gains, their returns pale in comparison to those on Wall Street. Among emerging currencies tracked by Bloomberg, only three have managed to strengthen in the face of a rising US dollar. The Brazilian real sank 21%, while the Mexican peso posted its worst year since the 2008 global financial crisis.
An MSCI Inc. index of EM stocks has notched a 5% return — its second-straight year of gains — but that trails a 17% gain on global equities and 20%-plus on the S&P 500 Index. In fact, developing-nation equities trade near their lowest-ever level relative to the S&P 500 since the late 1980s.
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 15% gain, seeing its best year since 2016.
Countries such as Argentina and Ghana benefited from the implementation of economic measures, with some Argentine dollar bonds notching gains of more than 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 1.9% while the broader index of EM debt handed investors a 6.6% 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, an 8% gain in Bloomberg’s dollar index kept EM currencies under pressure, with an MSCI gauge finishing the year in the red. Only the Malaysian ringgit, Hong Kong dollar, Thai baht have managed to strengthen this year.
Near the bottom is the Brazilian real, undermined by a budget deficit of about 10% of the country’s gross domestic product. The Mexican peso is not far behind, having shed more than 18%, weighed down by the prospect of Trump’s trade tariffs.
“The strong underperformance of many LatAm currencies was certainly an eye-catcher, especially as they also faced some of the highest real interest rates,” Quijano-Evans said.
The South African rand has depreciated for the fifth-straight year against the dollar, yet rising investment, slowing inflation and reform efforts by a new government have slowed its decline. Analysts predict it to strengthen 15% in 2025.
©2024 Bloomberg L.P.