JPMorgan Says Emerging Markets Debt Is ‘At The Mercy’ Of The Fed, Cuts Nigeria Overweight

A JPMorgan logo is seen in New York City, U.S., January 10, 2017. REUTERS/Stephanie Keith/File photo

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LONDON, May 9 (Reuters) – Emerging market sovereign debt is “at the mercy” of Federal Reserve interest rate decisions, JPMorgan analysts said in a note on Monday, as the bank’s rate hikes US central bank drain capital from developing markets.

JPMorgan removed Nigeria from its list of emerging market sovereign recommendations investors should be “overweight” on, saying the country had failed to take advantage of high oil prices, while adding Serbia and Uzbekistan.

The Fed last week raised its benchmark overnight rate by half a percentage point, the biggest jump in 22 years, as it seeks to rein in high inflation while its rate hikes also hit higher-yielding emerging markets. read more

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JPMorgan’s Emerging Markets Bond Index Global Diversified (EMBIGD) index has fallen 16% this year, analysts said, “with most of the losses coming from rates” and $4 billion in net outflows from emerging markets since mid April.

“The external and fundamental environment has become increasingly difficult for emerging market sovereigns,” the analysts said. “China’s COVID lockdown poses more downside risks.”

They noted that riskier sovereign yields were now 10.6%, the highest level since the first wave of the coronavirus pandemic in April 2020, reducing market access and increasing the risk of debt default. .

However, analysts said the “initial pain” for emerging market bonds, which they said had started to underperform in September 2021, was positive.

The Russian invasion of Ukraine in February sent commodity prices soaring, benefiting exporters. The outperformance of bonds issued by oil exporters now “appears to have dried up,” JPMorgan said.

Analysts said that the Nigerian national oil company did not transfer any income to the government from January to March this year, due to gasoline subsidies and low oil production, as it took Nigeria’s debt out of the category of ” overweight” of the bank.

“Nigeria’s fiscal problems amid a worsening global risk environment have raised market concerns despite a positive oil environment,” they said.

It led to Serbia being “overweight” as the risks had been priced in and the country had high reserves and a fiscally cautious government, the note said, while relatively low debt despite Russian exposure led them to place Uzbekistan in the same category.

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Information from Rachel Savage; Edited by Emelia Sithole-Matarise

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