Emerging markets debt investment views Q4 2025
We discuss our investment outlook for the current quarter, including the favourable cyclical factors that are expected to sustain the recent strong performance of emerging markets debt.
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Global growth activity continues to show resilience despite recent trade and geopolitical uncertainties. With ample financial liquidity and strong private sector balance sheets, upward revisions to growth expectations are occurring across several developed and emerging economies. Emerging market (EM) exports have also proved resilient despite US tariffs, helping to maintain EMs slightly above their long-term average growth differential relative to US. The key medium-term risk lies in US growth reaccelerating sharply in 2026. This could revive the “US exceptionalism” narrative and potentially crowd EM out of investors’ focus.
The global disinflation trend of the past two years remains intact, though the US may soon be an exception as tariff effects feed through, potentially undermining the credibility of the Federal Reserve’s current easing cycle. By contrast, EM inflation remains more benign, supported by subdued food and energy prices and China’s ongoing export of deflation. Disinflation from China is beneficial to EM economies with lower trade barriers and minimal export overlap with China. With inflation contained, interest rates across EM remain unnecessarily too high, leaving several EM central banks with ample room to ease.
Global financial liquidity is abundant, supported by elevated global real broad money growth and positive credit impulse indicators. EM foreign exchange (FX) reserves are also rebuilding steadily, supporting domestic liquidity in EM. This provides a favourable backdrop for EM debt, which is equally experiencing a recovery in inflows after years of substantial outflows.
The US dollar is likely to resume its cyclical downturn after a period of consolidation. While short-term sentiment indicators suggest the greenback is oversold, structural pressures persist. Expensive real effective exchange rate valuations, weaker interest rate support, large twin deficits and a negative net international investment position still exceeding 80% of GDP all point to sustained dollar weakness. Importantly, the greenback has now broken its long-term 15-year uptrend.
The outlook for commodities remains mixed. Oil markets are oversupplied into late 2025 and early 2026, with prices likely drifting toward the mid-$50s unless OPEC adjusts policy or geopolitical shocks reappear. Gold remains in a remarkably persistent bullish trend supported by central bank demand, and despite strong multi-year gains, shows no signs of late-cycle euphoria.
Geopolitical risks still appear underpriced, leaving financial assets exposed to flare-ups in tensions. While there are prospects for de-escalation in the Middle East, the Ukraine war has evolved into a war of attrition, with Ukrainian strikes increasingly targeting Russian refineries and infrastructure. These actions could impair Russia’s export capacity, while repeated Russian incursions into NATO airspace have substantially increased the risk of accidental escalation.
Tactical exposures to US interest rate duration can be justified by improved valuations in long-dated Treasuries and the apparent softness in US labour market. However, we remain alert to key downside risks, notably persistent fiscal imbalances and the potential for an inflation resurgence driven by trade tariffs, growth reaccelerating and easy monetary conditions. A break above the recent yield range — specifically the 5.1% level on the US 30-year bond — would serve as an early warning signal.
EM local debt remains our top sectoral pick. Dollar weakness, high real yields, the prospects of monetary easing in the context of well-behaved EM inflation and an incipient recovery in fund flows should continue to boost returns. We estimate that a diversified EM local debt portfolio could generate an expected 12-month return above 11%, notably thanks to high-yielding government bonds in countries such as Brazil, Mexico, South Africa, Hungary, India, Turkey and Egypt.
EM dollar debt should also generate attractive income. We expect a 12-month return of 7% from this sector, with high-yielding sovereigns like Senegal, Ecuador, Ivory Coast, Egypt, and Argentina still offering attractive upside potential.
These sector views are summarised in the table below:
Note: Interest rate duration refers to US rates performance. EM dollar debt IG forecasts investment grade hard currency debt, while EM dollar debt HY forecasts non-investment grade hard currency debt. Investment grade bonds are the highest quality bonds as determined by a credit rating agency. High yield bonds are more speculative, with a credit rating below investment grade. EM local rates forecast EM local currency bond prices, and EM currencies forecast EM currencies versus the US dollar.
Any references to securities, sectors, regions and/or countries are for illustrative purposes only. This document may contain “forward-looking” information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised.
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