Commodities Rally an Uneven Tailwind for Emerging Markets Debt
Fran Rodilosso, Head of Fixed Income ETF Portfolio Management, CFA
February 22, 2018
Commodity prices have been on a steady upswing since early 2016, rising over 40% through January 31, 2018.1 Many investors, assuming a tight link between commodity prices and emerging market local currency returns, fairly view broad emerging markets exposure as a way to play the recovery in commodities.
What's Behind the Correlation?
However, using oil prices as a point of reference, a wide dispersion is seen among individual currencies represented in the J.P. Morgan GBI-EM Global Core Index.
Emerging Markets Currencies Have Varying Correlations to Oil Prices
Source: Bloomberg. Monthly return correlation from 1/31/13 to 1/31/2018. Oil is measured by the first month WTI crude oil contract on the New York Mercantile Exchange. Past performance is not indicative of future results. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.
Currencies of oil exporters like Russia and Colombia have exhibited high correlations with oil prices over the past five years. The remaining 16 currencies generally experienced lower correlation, which is perhaps unsurprising given that over 60% of the index comprised net oil importers, as of January 31, 2018.2
The overall moderate correlation of index returns with oil prices reflects the diversity of economies within the index. Despite rising commodity prices since 2016, the majority of emerging markets local currency bond returns over the past five years have been driven by local interest rates rather than currency appreciation.
But overall, the emerging markets local currency bond index exhibits a positive correlation to commodity prices. A continuing commodities rally would likely provide support to emerging markets local currency bonds.
1Source: Morningstar. Reflects the cumulative return of the Bloomberg Commodity Spot Index from 1/20/2016 through 1/31/2018.
2Sources: VanEck research using most recently available data from U.S. Energy Information Administration and International Energy Agency, and J.P. Morgan for index weights as of 1/31/2018.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
J.P. Morgan GBI-EM Global Core Index tracks bonds issued by emerging markets governments and denominated in the local currency of the issuer, and are accessible by most international investors.
Indices are unmanaged and are not securities in which an investment can be made.
The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only.
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