 With all eyes on the US elections, we recommend further

reducing local debt exposure in vulnerable EM high yielders

 Low-yielding EM markets provide better protection against

any bouts of heightened risk aversion

 We turn more bearish on Brazil and South Africa; prefer

mainland China, Korea, Thailand and Israel

All eyes on the US. There is a real risk that the results of the US elections on

3 November will be contentious and lead to a bout of temporary risk aversion. At the

start of the month, we adopted a mildly bullish stance on EM external debt vs a mildly

bearish stance on EM local debt. We now recommend further reducing exposure to

vulnerable EM high yielders and, in particular, we shift our stance on Brazil to bearish

from mildly bearish, and on South Africa to mildly bearish from neutral.

Prefer ‘safer havens’. EM local bond yields have on average fallen to below prepandemic

levels. The risks are now more tilted for higher yields with increasing event

risks, diminishing space for policy easing, and prospects of higher volatility. Lowyielding

EM markets provide better protection against any heightened risk aversion.

For example, at times of heightened global risk aversion or EM contagion, Korea’s

bond market is typically a recipient of foreign inflows. In mainland China, the interest

rate differential of China government bonds (CGBs) vs developed markets and the

inclusion in global bond indices are likely to support foreign demand and a

compression of CGB yields vs developed markets. Other ‘safe haven’, low-yielding,

higher rated local markets we like are Thailand and Israel.