Emerging market debt likely to keep basking in the sun

Talking Heads podcast recording on emerging market debt with Alaa Bushehri

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing emerging market debt. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Alaa Bushehri, Head of Emerging Market Debt. Welcome, Alaa.

Alaa Bushehri: Hello, glad to be here.

DM: It’s been an interesting, challenging year. On one hand, when you’re dealing with emerging market assets, we think about [US] tariffs, geopolitics both in developed and emerging markets, changes in what we think the US Federal Reserve is going to do. Nonetheless, emerging market [debt] has had a good run in 2025, seemingly able to navigate all the uncertainty. How do you explain this positive performance?

AB: : I always say emerging markets, it’s either interesting or very interesting. And performance this year has been quite strong on both the hard currency and local currency universe. We saw about 10% in hard currency year-to-date and close to 15% on local currency. What we really saw was something you could describe as a decoupling of the performance and of policy action in emerging markets versus their developed market peers.

This was driven by good fundamentals across emerging markets, credible central bank policy and growth that has continued to be resilient while we saw the macro backdrop being quite challenging at times. Parallel to that was emerging market economies being driven by their own targets and metrics, an independent easing policy coupled with strong fundamentals.

DM: If we dive deeper, can you talk about on one hand what the dynamics have been for hard currency or US dollar debt as opposed to the performance for local currencies?

AB: For a hard currency, it has been correlated to how {US] Treasuries have been trading. We did have a starting point of [credit] spreads that were arguably tight at the beginning of the year on both investment-grade and the high-yield space. Even now where we are tighter, it does stand to stay intact and resilient, even in pockets of [market] volatility. In the high-yield space, fundamentals have been on a positive trajectory. We did see a reach for value, for yield in that space. So, although spreads are tight, all-in yields are still attractive. Idiosyncratic opportunities are always available in EM.

On local currency sides, it has been a supportive backdrop in terms of the weaker dollar, which is supportive to the asset class. But away from that, what is really driving the performance are the easing [central bank] policy that we have seen executed in emerging economies. That has led to strong performance across local rates, which for us is where the conviction is and where the performance driver has been, and we continue to focus there.

DM: Those were the easy questions. Now the hard ones. You mentioned the Fed as being a key factor driving the performance for hard currency debt. If you think about what you anticipate for next year, what’s in your mind?

AB: For us, the single largest risk factor to global markets is the macro backdrop. And by that I specifically mean the Fed. We have seen this dispersion in views among the Fed members. And we have a Fed chair who is on his way out and a new [rate-setting] committee for us to follow next year. The question here is will the Fed decide to cut [rates] regardless of the availability of data, the quality of the data. That is going to influence where global rates are and influence the risk appetite across global markets including EM. For us, the risk is going to be driven by the macro backdrop and what the Fed does here. And that’s across both local currency and hard currency. That we will have to navigate at least into the first half of next year.

Away from that, we do have the positive fundamentals. We see a monetary easing policy being supportive for performance next year. We expect the dollar to remain range-bound, and we have resilient and positive global trade and that’s growing between the EM countries. We expect stronger regionalisation to continue supporting EM economies. Commodity prices have been supportive as well, benefiting exporters.

DM: If I could summarise some of the key points Alaa, you talked about good performance in 2025 both for hard and local currency emerging market debt driven by positive fundamentals, credible emerging market central bank policy and resilient growth. You highlighted that for hard currency, emerging market debt, spreads more or less stayed tight throughout the year, providing that good performance, whereas on the local currency side, supported by a weaker US dollar, but fundamentally driven by easing policies from the central banks. Looking ahead, you highlighted what might happen with the Fed, a new chair and potentially a new [policy] committee. Away from the Fed, you pointed to central banks in emerging markets continuing to ease, the dollar hopefully range-bound, but on the weaker end, and also support from resilient global trade and commodity prices. Well, Alaa, thank you very much for joining me.

AB: Thank you, Daniel.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities in emerging market debt, please reach out to your asset management contact. We recommend subscribing to Talking Heads on your favourite podcast channel such as YouTube or Spotify. You’ll receive your podcast episodes every week. If you like Talking Heads, leave us a positive review and a nice rating. You were listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Alaa Bushehri, Head of Emerging Market Debt. Please do join me next week. Until then, take care.