Emerging markets debt investment views – November 2025
Emerging market (EM) debt delivered another strong performance in November, supported by renewed momentum in local-currency markets and resilient hard-currency income. We maintain a constructive stance on local bonds and select high-yield issuers, as firmer currencies, easing inflation and improving capital flows continue to underpin the asset class.
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Emerging markets debt delivered another strong monthly performance in November, with local-currency debt regaining momentum and extending its 2025 outperformance. This was driven by a combination of high income generation, bond-price appreciation and firmer currencies. The GBI-EM GD index is now up 17.5% year-to-date, having added 1.4% in November. We have favoured this sector in our asset-allocation framework throughout the year, and this stance remains unchanged, as reflected in the macro scorecard in Figure 1. Within the local segment, we expect markets such as Brazil, Mexico, Turkey, Egypt, the Philippines, South Africa and Hungary to generate returns in excess of 10% in US-dollar terms over the next 12 months.
Hard-currency debt has also continued to deliver solid returns despite historically tight corporate and sovereign spreads. The EMBI GD index returned 0.4% in November, bringing year-to-date performance to 13.5%. We continue to identify attractive pockets of value among several high-yielding sovereign and corporate issuers. Overall, we expect the bulk of hard-currency debt performance to be driven by income, which should take our 12-month expected return to a still-respectable 7.5% for this sector.
These views are summarised in our sectoral scorecard in Figure 1.
The positive fundamental, technical and sentiment factors that have underpinned the strong returns of the past three years remain firmly in place and have recently started to be more widely recognised by global asset allocators, as evidenced by the renewed inflows into EM debt funds. While valuations in hard-currency debt have deteriorated, momentum remains strong, and credit metrics continue to trend positively (Figure 2). Moreover, local-currency debt still benefits from substantial valuation support and should continue to be aided by a very benign inflation backdrop across several emerging economies (Figure 3).
This favourable inflation outlook, together with this year’s recovery in capital flows, should give EM central banks further scope to ease monetary policy, reinforcing an already supportive domestic liquidity environment. As a result, emerging-market economic growth is expected to strengthen in 2026, particularly as the upturn in monetary and credit cycles unfolds against a backdrop of already robust private-sector balance sheets. Encouragingly, EM exports have also remained resilient despite the headwinds from recent US trade tariffs.
We expect these dynamics to keep the average EM growth premium over the US at levels that have historically been sufficient to sustain the recent renewed investor appetite for EM assets (Figure 4). However, China’s growth trajectory may remain subdued, constrained by persistent weakness in the property sector and the lingering risk of renewed trade or geopolitical tensions with the United States. That said, continued calibrated policy support in China, together with a remarkably strong external position (including a healthy trade surplus and ample foreign-exchange reserves) should continue to provide a meaningful buffer against downside risks.
We conducted a research trip to Poland, Hungary and the Czech Republic in November. We returned from our meetings with policymakers and various private-sector contacts with a more constructive outlook on regional assets. While Central European sovereign hard-currency debt offers very limited value given historically tight spreads, we see reasonably attractive upside potential in local bonds and currencies. External accounts are in solid shape across all three countries. Hungary is facing some widely publicised fiscal and growth headwinds (re-assessed below), but both Poland and the Czech Republic continue to benefit from a compelling combination of strong growth and well-behaved inflation.
On top of these favourable macroeconomic trends, we also see potential tailwinds for the region from the possibility of a peace agreement between Russia and Ukraine (although this is not our central scenario), as well as from a likely improvement in sentiment should Hungary undergo a “regime change” following the April 2026 general election.
Hungary: recent local bond market weakness provides a good re-entry opportunity
The upcoming election in Hungary has contributed to a more cautious market tone toward the country’s assets. Fiscal uncertainties ahead of the elections have triggered a modest correction in sovereign spreads, which widened by 20bps in November but still stand at relatively unappealing levels of around 130bps. Local government bonds have also come under pressure, with 10-year yields drifting higher toward what appears to be a key technical level of 7%. It is encouraging that despite these pressures, the yield ranges that have prevailed for most of the past two years remain broadly intact and that the forint has continued to perform remarkably well, extending its year-to-date appreciation versus both the US dollar and the euro to 21% and 8%, respectively.
Recent upward pressures on local bond yields reflect rising concerns about a significant deterioration in the fiscal outlook ahead of the 2026 general election, amid suspicions that Prime Minister Orban may escalate populist spending measures to bolster his re-election prospects. These worries were amplified by Orban’s announcement of the so-called “Financial Shield,” widely viewed as a PR stunt but presented as a strategic partnership allegedly backed by President Trump to provide Hungary with necessary external financing from the United States. Adding to these fiscal uncertainties, the recent resignation of the Central Bank Deputy Governor Virag has further impacted policy credibility.
Following our research meetings in Budapest, we actually returned with a more constructive outlook and stand ready to use the recent market correction to reinstate meaningful exposures to Hungarian local government bonds for the following reasons:
There is a distinct possibility of a positive regime change in 2026:
The political environment is becoming increasingly competitive ahead of the April 2026 general election. Polls currently show the opposition leading by around 5%, although many observers expect this margin to narrow as Prime Minister Orbán and the Fidesz party deploy their well-established election machinery. The electoral system, media control and potential adjustments to the voting framework continue to favour Fidesz, leaving the race effectively 50/50 at this stage. However, if the opposition Respect and Freedom (Tisza) party maintains a lead of more than 3% going into early 2026, the probability of an opposition victory increases materially.
Public dissatisfactions with institutional erosion, corruption, and deteriorating public services have weakened somewhat Orban’s strong grip on power and amplified support for the opposition. Peter Magyar has emerged as a credible challenger after resigning from Fidesz in the wake of a presidential pardon scandal. His alignment with the Respect and Freedom (Tisza) Party, public criticism of Fidesz, and mobilisation of large anti-government demonstrations have positioned him as a unifying, centrist figure capable of consolidating the broader opposition. Tisza is viewed as competent, with an economic team that presents a coherent pro EU policy framework.
A Tisza-led government would likely pursue improvements in rule-of-law standards, enabling the release of frozen EU funds, and would prioritise regulatory reforms aimed at revitalising investment. The party has also expressed support for eventual euro adoption - a development that would materially enhance Hungary’s positioning within the EU and could be structurally positive for Hungarian assets.
Pre-election fiscal deterioration is unlikely to be as severe as markets had feared:
Market concerns have been heightened by the government’s recent announcement of fiscal easing, which appears misaligned with the already challenging macro-economic backdrop. With elections fast approaching, the window of opportunity (and the scope) for the government to introduce additional discretionary fiscal measures is beginning to close. Authorities may attempt to front-load elements of already announced programmes—such as the gradual introduction of a 14th-month pension—but further expansionary steps are constrained.
Inflation dynamics remain difficult to assess. Headline CPI is expected to print below 3% in the next few months notably due to favourable base effects. However, price caps that have been instrumental in bringing inflation down, are likely to remain in place until after the 2026 election. Their eventual unwinding is uncertain in both timing and scale. Post price cap removals possibly next year, we expect inflation to rise toward 4.5% before gradually declining. This profile limits the scope for meaningful monetary easing before late 2026.
Concerns over a sovereign downgrade to non-investment grade have eased, with both S&P and Moody’s keeping Hungary on hold.
High real yields and healthy external accounts provide strong support for the currency and for local government bonds:
The political and fiscal fears highlighted above have already been reflected in the valuations of the local bond market, which trades at relatively high real yield levels (figure 5). This positive real rate support is further reinforced by a favourable currency outlook due to ample sovereign external liquidity (figure 6) and by monetary authorities becoming more open to let the currency appreciate as part of their effort to maintain inflation under control.
We have very limited visibility on possible rate cuts given the uncertainties on the scale and the timing of a possible removal of price caps. These are expected to remain in place at least until the election in April 2026, which implies suppressed pricing signals and delayed inflation normalisation. The catalyst for bond yield resuming their convergence towards the regional norms will be more driven by the end of the election uncertainty, especially in case of the opposition winning. This potential tailwind would improve the prospects of reinforcing the rule-of-law, the resumption of EU-fund disbursements and a strong recovery in investment. In any case, the post-election environment is likely to be characterised by a more orthodox policy mix, which should support long-dated government bonds and currency.
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