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Declining inflation re-injects value into EM local bonds

Weekly investor research

11 February 2019

Despite strong performance in January, Emerging Markets (EM) local currency bonds retain their attractiveness due to the continuing decline in inflation in EM countries. Fears of pass-through from last year’s currency weakness to inflation have proved, once again, to be unfounded except in a small number of countries, which have yet to learn the basics about macroeconomic management. In other developments, Thailand’s political environment is suddenly a lot more interesting, OFAC rules that PDVSA 2020 bond holders can foreclose on CITGO, if required, and Russian growth significantly beats expectations. Also, the Brazilian government’s draft pension reform proposal appears to be more ambitious than anticipated, Pakistan’s credit rating is downgraded, Jokowi has a strong lead in polls in Indonesia and flows into China’s domestic bond market look set to pick up significantly.

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