By Jorgelina do Rosario

LONDON (Reuters: JPMorgan (NYSE) has issued a Sell recommendation for emerging market sovereign debt in local currencies due to global fallout of the Russia-Ukraine crises.

JPMorgan has estimated that assets in emerging markets with fixed income have lost 6-9% of their value following Russia’s invasion of its neighbor a month earlier. This is due to nervousness and the impact it will have on world energy and food prices, which adds to current pressures.

Most EM central banks have signalled that interest rates must rise quicker than expected, raising concerns over economically crippling bouts of “stagflation”, where both high inflation and higher interest rates sap growth.

In a late Thursday note, JPMorgan analysts stated that “a month of war has accelerated current trends and surfaced vulnerability.”

JPMorgan said that it was sensible to use the U.S. Federal Reserve’s and other emerging-market central banks’ recent interest rate increases to “take advantage” of local currency bond yields against U.S. Treasuries in order to gain an ‘underweight’ position in emerging markets assets.

According to the U.S. Investment Bank, major metal exporting nations like South Africa and Chile could do well. However, it warned that EM fixed income assets were more likely to face a “stagflationary” trajectory.

Moscow called it a “specially military operation” in Ukraine. This has added to an already slow year of emerging market sovereign bond sales.

Cumulative issuance in the year to-date has been one of its lowest ever recorded. JPMorgan predicts that EM-wide bond issuance would be much lower than previous years, at $142 billion by 2022.

Analysts at the bank added that “this risk-off climate has also increased costs for countries trying to issue bonds using hard currency.”

Certain countries that are most at risk from rising energy prices and higher food prices will also need to implement “crisis-lite playbooks.”

This week, Egypt saw a 15% currency devaluation and asked the International Monetary Fund for additional assistance. Sri Lanka is also overcoming its long-held resistance towards IMF aid, while Tunisia holds talks.

JPMorgan stated that the medium-term investment outlook for these countries is more difficult.