The widely followed emerging market ("EM") local currency benchmark, the JP Morgan GBI-EM Global Diversified Index (the "Index") returned 4.42% for the 1st quarter of 2018. The yield on the Index fell 13 basis points (bps) over the quarter to 6.01% while 5-year U.S. Treasury bond yields rose 35 bps.
Stronger emerging market currencies resulted in a gain of 2.08% for the Index over the quarter as these currencies strengthened versus the U.S. dollar on average. The remaining return for the Index came from the return of the emerging market domestic treasury bonds.
Through the first quarter we continued to see economic fundamentals improve across many emerging market countries. The uptrend in economic growth can be seen by the steady improvement in manufacturing surveys across regions.
The chart below shows the Markit manufacturing purchasing indices of some of the major emerging market countries, China, India, Brazil, Russia and South Africa as well as the combined Markit Emerging Markets Manufacturing PMI Index. Numbers over 50 indicate periods of improving economic conditions while under 50 indicates periods of falling economic conditions. There has been a steady improvement in these surveys since the end of the first quarter of 2015 for most emerging market countries with a slightly more protracted period of weakness seen in Brazil.
Part of the reason sentiment continues to improve is the dramatic easing we have seen in many emerging market countries in response to lower inflation and their stronger currencies. The average monetary policy rate of the 20 emerging market countries we follow most closely has declined from 4.83% at the beginning of 2015 to 3.86% as of the end of the 1st quarter of 2018. We believe the lower interest rates are a strong impulse to help stimulate domestic demand and broader economic growth going forward.
to continue reading.