Inflation soon to peak in EM?
Despite robust inflation across emerging markets, many local sovereigns boast positive real (inflation-adjusted) yields, which is certainly not the case in most developed markets. Emerging markets have a higher weighting towards food and energy in their inflation indices, and the recent decline in commodity prices, combined with the lagged impact of monetary tightening in many countries, should help inflation to fall later this year, in our view. This could further support local currency yields. Many EM countries with large local markets are on sounder financial footing than during previous hiking episodes, with stronger current account positions and higher foreign currency reserves. Many EM currencies are also still looking cheap, particularly after the recent extended episode of US dollar strength. We believe these are all important factors that should support EM sovereign bond returns when inflation starts peaking.
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