Emerging market debt investment views – April 2025
We present our outlook for Q2 2025. The global growth environment is deteriorating but within the asset class we see emerging market local rates as offering the most attractive opportunities.
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The global growth outlook has deteriorated significantly. Stagflation has now become a distinct possibility due to the substantially more aggressive than expected import tariffs announced by the US, persistently tight monetary policies, the ongoing deterioration in global financial liquidity and increasingly constrained fiscal positions.
Adjustments lower to emerging market (EM) growth expectations are already well advanced and we are now also seeing significant downward revisions to growth estimates in the US due to extraordinary policy uncertainty, restrictive immigration policies, a weakening fiscal impulse, and the labour market losing momentum.
The global disinflation trend of the last two years has paused, with an increasing number of countries seeing upward revisions to inflation expectations. The US could experience a new inflation scare, driven by aggressive import tariffs. However, this should not impact severely the ability of EM central banks to ease given the extremely high levels of real rate buffers and our long-standing bearish view on oil prices, which we now expect to drop to the low $50s based on our current supply and demand projections.
Our measures of global financial liquidity are decelerating, as the rebound of the last 18 months in monetary aggregates (i.e. the amount of money in circulation) has stalled and foreign exchange reserves growth has decelerated significantly. However, the global credit impulse has turned positive, especially in Europe, where a domestically driven cyclical growth upturn may gain traction once the current global trade uncertainties have been absorbed.
Additionally, there is now a distinct possibility that the extremely negative US net international investment position could start to adjust after reaching a staggering -80% of US GDP. This adjustment is likely to boost a cyclical downturn for the US dollar. (The net international investment position is the difference between the value of US assets in other countries and liabilities to residents of other countries).
The outlook for commodity prices remains mixed. Oil prices are likely to remain at depressed levels given ample supply and significant downside risks to demand. The recent rally in base metals has paused but our long-standing bullish view on gold is maintained given globally persistent fiscal, monetary and geopolitical fragilities.
Geopolitical risks remain high. Increasing US isolationism, the potential vacuum created by the ongoing reshaping of Western alliances, and the consequences of the ongoing global trade war have increased risks substantially. While a temporary ceasefire deal in Ukraine may still be within reach, sustaining it will be extremely challenging.
We remain tactically constructive on US interest rate duration due to the deteriorating US growth outlook. However, we stand ready to reassess this position given the resurgence in inflation risks, the long-term uptrend in US Treasury bond yields remaining in place despite the recent drop in growth expectations, and the market short squeeze we expected last quarter having now been completed.
The recent widening in EM dollar debt spreads has further to go. Despite the ongoing sharp correction, EM sovereign spreads are not yet at appealing levels as they have only just started to reflect the ongoing downward revisions to growth expectations.
EM rates offer the most attractive opportunities within the asset class due to high real yields, controlled inflation in EM, substantially more favourable debt and fiscal dynamics in EM compared to developed economies, and very low foreign participation in EM domestic bond markets. Additionally, several EM currencies are showing some encouraging resilience in the face of the ongoing trade war and could be further boosted if recent signs of a weaker trend in the US dollar is confirmed.
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