BNP Paribas AM - August sell-off in EM debt – contagion crisis or buying opportunity?


August saw large drawdowns in emerging markets, reminiscent of the trend seen in the second quarter, as assets sold off over a number of factors, most notably the deteriorating economic situation in Turkey.

Turkey’s vulnerability was not entirely a surprise given the deteriorating fundamentals: severe external debt imbalances with a high reliance on foreign portfolio flows to fuel economic growth; significant inflation pressures worsened by a depreciating lira; a poor central bank reaction function and governance issues around government involvement; high private sector debt…. the list goes on.

Geopolitical tensions beyond Turkey also fuelled the wider sell-off. New US sanctions imposed on Russia sparked market speculation over additional US measures including a blanket ban on new sovereign bond purchases. Other EM countries with debt vulnerabilities, poor current accounts, inflation concerns and heightened political risk came under pressure, particularly their currencies.

Read our analysis of the extent of the correction in EM debt and the selected opportunities this could offer investors seeking an attractive risk/return trade-off and portfolio diversification.