Dollar bonds from some of the world’s weakest economies have become a standout performer in an otherwise lackluster year for emerging-market (EM) assets. Despite gains in developing-world assets, their returns fell short compared to those on Wall Street.
Only three emerging-market currencies tracked by Bloomberg managed to strengthen against the rising US dollar. The Brazilian real plummeted by 21%, and the Mexican peso experienced its worst year since the 2008 global financial crisis.
An MSCI Inc. index of EM stocks showed a 5% return, marking its second consecutive year of gains. However, this performance was dwarfed by the 17% gain in global equities and over 20% on the S&P 500 Index. In fact, emerging-market equities now trade at their lowest-ever level relative to the S&P 500 since the late 1980s.
Simon Quijano-Evans, chief strategist at Gramercy Ltd. in London, noted that EM equities and local-currency bonds tend to underperform compared to US peers whenever the US dollar strengthens. He added that next year’s performance for emerging markets will heavily depend on President-elect Donald Trump’s policies and their impact on the US dollar.
Certain markets did outperform, with equities in Argentina, Pakistan, Sri Lanka, and Kenya leading the way. China’s stock index also rose nearly 15%, its best annual advance since 2020, buoyed by Beijing’s stimulus efforts.
Meanwhile, Bloomberg’s gauge of EM high-yield dollar bonds emerged as the top-performing asset in the sector, with a 15% gain — its best performance since 2016. Argentina and Ghana benefited from economic measures, and some Argentine dollar bonds gained over 100%. Ukrainian bonds also saw gains of more than 45% since September, driven by investor optimism over a potential end to the conflict with Russia under a Trump presidency.
These high-yield markets significantly outperformed EM investment-grade debt, which posted a modest 1.9% return. The broader index of EM debt offered investors a 6.6% gain.
Carlos de Sousa, an emerging-market debt portfolio manager at Vontobel Asset Management, expressed skepticism about the sustainability of the high-yield rally, emphasizing the importance of careful country and credit selection going forward. “We’re more diversified than usual at the moment, as many of our favorite bets played out in 2024,” he said.
At the same time, Bloomberg’s dollar index surged by 8%, pressuring EM currencies. The MSCI gauge for EM currencies finished the year in the red, with only the Malaysian ringgit, Hong Kong dollar, and Thai baht managing to strengthen. The Brazilian real faced challenges from a budget deficit of about 10% of GDP, while the Mexican peso fell over 18%, affected by the looming threat of Trump’s trade tariffs.
“The underperformance of many Latin American currencies stood out, especially since they faced some of the highest real interest rates,” noted Quijano-Evans.
The South African rand depreciated for the fifth consecutive year against the dollar, but rising investment, slowing inflation, and reform efforts by the new government helped slow its decline. Analysts are predicting a 15% appreciation for the rand in 2025.
