Many emerging market economies have robust fundamentals: strong external demand, stabilising inflation and monetary policy easing, While their GDP growth is expected to outpace that of their developed market peers, there could be some headwinds in the first few months of 2025 from renewed uncertainty around the US Federal Reserve’s rate cutting cycle, the Trump administration’s policy agenda, the outlook for geopolitics and a strong US dollar.
China, the largest EM economy, has been the centre of attention for many investors tracking the country’s progress over 2024. It will likely remain a key focus in 2025 as the authorities seek to deliver a more proactive policy boosting consumption and technology, stabilising trade and foreign investment, and rejuvenating the workforce and entrepreneurship. Policy support is also expected to be channelled to the property and stock markets.
Many emerging markets have a healthy balance of payments and sovereign issuers have generally become more prudent in debt issuance and fiscal policies. Ratings agency Fitch accorded EM sovereigns moderate net positive ratings in 2024 as economies improved through progressive reforms.
We expect further such fine-tuning over 2025 as some of these countries continue to correct distortions in their foreign exchange markets, rein in public debt, accumulate foreign exchange reserves, and lay the foundations for sustainable growth.
We note that in our portfolios, our high-conviction active views are grounded in bottom-up research, with macroeconomic factors playing a less prominent role. While our portfolios are not immune to macro factors, the effects should be limited. Thus, the latest macro developments – to be specific, the talk, in early February, of the imposition of 25% tariffs on all goods coming from Mexico by US President Donald Trump – should not merit any significant changes in our views or positioning on Mexican bonds in the short term.
Solid corporate debt fundamentals
Many corporate debt issuers are maintaining lower levels of net leverage and have higher interest coverage ratios relative to their developed market peers. We see their solid fundamentals, along with falling default rates (versus prior years), and lower valuations relative to developed market peers as an attractive proposition.
For hard currency sovereign and corporate bonds, we see US duration risk as broadly balanced. While many expect the Fed to ease US rates further, the new administration’s fiscal and trade stances have prompted concerns that they could reignite inflation. In this context, we are comfortable keeping our duration positioning at neutral to slight positive.
We believe that emerging market bond spreads offer better value than those of their developed market peers. After the significant compression in 2024, we are more positive on idiosyncratic cases and selected frontier markets, which we believe still offer attractive opportunities. We view investment-grade bond valuations as excessively stretched and are selective here.
Expect further interest rate cuts
For local currency bonds, the environment looks attractive. Economies should remain strong thanks to solid private consumption, investments and exports. We expect some further monetary policy easing in 2025, albeit at a slower pace than in 2024. Local rates in selected Latin America and frontier markets look appealing from a valuations perspective.
Turning to currencies, we see improvements in fundamentals, valuations and technicals as reasons to be positive. We expect the strength of the US dollar to ease off by the second half of 2025. Currencies look to benefit from more resilient growth and a widening growth differential with developed markets over the medium term.
In summary, we believe emerging market debt is an exciting asset class which requires careful navigation of markets over the shorter term. We are optimistic over the longer-term prospects and the asset class’s ability to offer attractive opportunities to investors.
Disclaimer
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
