Economics: Emerging markets diverge

External pressure on EMs may be starting to ease

The factors that drove the increase in external financing costs for EMs may be starting to reverse. Food and energy prices have peaked. The Fed is getting closer to the end of its rate cycle. China’s efforts to stabilise its property market may protect its banks.

But some probably cannot regain market access

19 countries in the JP Morgan EMBI are in debt distress or default, and non-investment grade yields are above 14%. These countries are under extreme austerity pressure, and many will likely be unable to avoid default.

This is resulting in more divergence across the EM universe 

Many of the major EMs are well positioned to ride out a global recession over the next year. But some smaller EMs are likely to slip into default. This may result in an increased divergence in EM assets, weighing most heavily on hard-currency bonds.