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Post Brexit, some things are becoming clearer, and they are impactful for emerging markets even if the fundamental effect will be small, as most observers—including us—are tentatively concluding. In reverse order of importance, we note three things: 

(i) the political fallout will be excruciatingly drawn-out;
(ii) there will be a hit to UK growth with potential broader impacts as jobs (particularly financial services jobs) move in response to prolonged uncertainty, no matter how clever the proposed solution for a soft Brexit landing;
(iii) lastly, Brexit has meaningfully deepened the global dependence on central bank largesse in light of those lower global growth prospects.

This week the BOE virtually promised a summer rate cut and opened the door for more creative easing, a press story reported the ECB would expand the range of its asset buying program, and it became ever clearer the BOJ will ease at least by the end of July as the yen treads water around the important 100¥/$ mark.

Markets have chosen to focus on the easing more than the event, and asset prices are broadly at, approaching or beyond pre-Brexit levels. The pile of negative yielding debt in the world now stands at about $11.7 trillion.

It becomes ever clearer now that risk-free fixed income assets in developed markets are tremendously dependent on ever greater amounts of central bank maneuvering. Any potential cessation of that broad policy stance resulting in a small price move will have deeply negative effects on returns.
The chart below shows how—we strongly believe—emerging market debt should and will be looked at in this global context. Spreads to the global government bond index are extremely cheap relative to history. As developed market yields go to zero and below, income-starved investors will focus on this metric.

Source: Bloomberg, JP Morgan; JPMorgan EMBI Global Diversified and JPMorgan Government Bond Index; data as of July 1, 2016. Past performance is no guarantee of future results.

Just as investors looking for mean reversion in developed market bond markets have been consistently wrong-footed as central banks have distorted markets, investors judging emerging market yields by historical comparisons are likely to be wrong-footed, we believe, if they conclude those yields cannot go meaningfully lower.