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JPMorgan cuts EM local currency bonds to underweight as Russia-Ukraine issues bite

FILE PHOTO: JP Morgan Chase & Co sign in front of their New York headquarters
FILE PHOTO: A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. REUTERS/Mike Segar

March 25, 2022

By Jorgelina do Rosario

LONDON (Reuters) – Analysts at JPMorgan have issued a sell or “underweight” recommendation for emerging market local currency government bonds amid the global fallout from the Russia-Ukraine crisis.

EM fixed income has lost 6-9% of its value since Russia invaded its neighbor a month ago, JPMorgan estimates, with jitters over the war and its impact on global energy and food prices adding to existing pressures.

A number of leading emerging market central banks are signaling that interest rates will now need to rise faster than previously thought, raising concerns about economically debilitating periods of ‘stagflation’ – when high inflation and interest rate hikes weaken growth.

“A month of war has accelerated existing trends and exposed vulnerabilities,” analysts at JPMorgan said in a note released late Thursday.

As the U.S. Federal Reserve and emerging-market central banks hiked interest rates, JPMorgan also said it “makes sense to take advantage of the recent decline” in local-currency government bond yields versus U.S. Treasuries to go “underweight” in emerging-market assets.

The US investment bank said major metals-exporting countries such as South Africa, Chile and Peru could still do well, but warned that EM fixed income assets in general were now facing “stagflationary” trajectory.

What Moscow has dubbed a “special military operation” in Ukraine has also exacerbated an already slow start to the year for EM government bond sales.

Cumulative year-to-date issuance is one of the lowest on record, and JPMorgan forecasts EM-wide bond issuance will now be well below previous years at just $142 billion in 2022.

“This risk-off environment has also increased costs for those countries trying to issue hard currency bonds,” the bank’s analysts added.

Some countries most vulnerable to higher energy and food prices also need to adopt “crisis-light” playbooks.

This was seen this week as Egypt devalued its currency by 15% while asking for additional support from the International Monetary Fund. Sri Lanka has also overcome longstanding resistance to IMF assistance, and Tunisia is holding talks.

“The medium-term investment prospects for these countries therefore look more difficult,” said JPMorgan.

(Additional reporting by Marc Jones; Editing by Kirsten Donovan)

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DUSTIN JONES

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