Despite ongoing macroeconomic uncertainty, the global economy has held up better than expected in 2025, with financial markets broadly performing well. However, risks remain—from mixed signals in U.S. data to China’s structural challenges and persistent concerns around global fiscal sustainability. Yet, for Emerging Markets (EM), this environment continues to present compelling opportunities.
As we enter the final quarter of 2025, EM fixed income remains well-positioned, supported by a favorable mix of macro and microeconomic factors: the Federal Reserve’s renewed easing cycle, stable commodity prices, and a weaker U.S. dollar. Still, with tight valuations and diverging local monetary policies, careful asset selection will be key.
Hard Currency Sovereigns: Strong Returns, Broad Support
EM hard currency sovereign debt has returned approximately 11% year-to-date as of what MM DD,, as measured by the JP Morgan EMBIG Diversified Index. This performance has been underpinned by:
- Commodity Support: Exporters of gold and other raw materials have benefited from strong pricing. Even though oil markets remain uncertain, we believe a Brent price above $60/bbl in 2026 should be manageable for both importers and exporters. (See Figure 1.)
Sources: ABC
- Credit Rating Momentum: The sovereign rating outlook continues to improve. Oman, Morocco, and Azerbaijan have gained investment-grade status, while fears of Romania’s downgrade have eased. Though Panama is likely to lose its investment-grade rating, potential upgrades in Kenya, Egypt, and Pakistan could serve as positive catalysts. (See Figure 2.)
Source: JP Morgan
Net Rating Action: Based on the number of upgrades and downgrades, with the net rating actions equal to the difference between the two. Actions from all three major rating agencies (Fitch, S&P, Moody’s) are included and all upgrades/downgrades are counted. For example, if an issuer is upgraded by all three agencies twice within a 12-month period, it would count as 6 upgrades.
- Inflows: Higher all-in yields have driven renewed interest in EM credit. U.S. investment-grade funds are increasing allocations (sources: JP Morgan, EPFR), while Chinese investors continue to steadily grow their holdings of non-China EM USD bonds (sources: JP Morgan, EPFR), a trend that now appears structural.
At a country level, The Bahamas stands out, supported by improved debt management, fiscal discipline, and strong tourism inflows linked to climate-driven travel trends (source: Bahamas Ministry of Tourism, Bahamas Ministry of Finance). Uzbekistan is also compelling, with gold-backed exports and ongoing structural reforms offering tailwinds. Meanwhile, Argentina faces renewed FX pressure. Despite international support, including from the U.S., we believe credible and decisive policy actions will be essential to restore macroeconomic stability and build a sustainable FX regime.
Local Currency Sovereigns: Leading Performance
Local currency EM sovereign bonds have outperformed hard currency peers, delivering over 15% YTD (JP Morgan GBI-EM Global Diversified Index). The combination of Fed easing and a weaker USD forms an uplifting external backdrop for the asset class to perform strongly. Regionally, we favour Asia, where inflation dynamics are improving and FX has remained stable, helped by a more benign-than-expected USDCNY trajectory. We have turned increasingly constructive on Hungary. We see potential upside in the event of an opposition victory in the April 2026 parliamentary elections. Even without political change, we believe Hungary’s macro fundamentals appear well-anchored, and the broader appetite for EM local currency exposure should provide tailwinds. Elsewhere, we find attractive value in both FX and rates markets in Peru and South Africa.
EM Corporates: Fundamentals Solid, Spreads Tight
EM corporate bonds have delivered over 7% in returns YTD, supported by strong fundamentals and robust demand. However, spreads remain tight, with the JP Morgan CEMBI Broad Diversified index trading near historical lows of around 200bps.
Despite valuations, we remain constructive:
- Stable Credit Metrics: While slightly off-peak levels, most companies are managing well despite higher rates.
- Diverse New Issuance: Activity has broadened across regions and sectors, while flows have turned firmly positive (sources: JP Morgan, EPFR). Investors are engaged, drawn to debut issuers and unique credit stories.
- Sector Views:
- Defensive Picks: We favour utilities, particularly in Turkey, Mexico, and Indonesia.
- Resilient Financials: Banks and other financials have held up well across cycles.
- Latin America: Airlines have rebounded strongly, with improved supply-demand dynamics.
- Middle East: Pipeline operators are well-positioned amid stable commodity conditions.
- Brazil: Energy services companies offer compelling thematic exposure.
- India: Despite tariff headwinds, high-yield corporates remain backed by stable fundamentals and deep domestic capital markets.
Conclusion: Precision Over Broad Exposure
It is our view that the EM fixed income market remains rich with opportunity heading into Q4 2025. The macro backdrop is broadly supportive, but tighter valuations and diverging policy paths mean precision matters more than ever.
With global growth fears easing but risks still present, successful investing in EM debt will depend on navigating country-specific stories, policy developments, and sector dynamics. In this environment, we believe a selectively positioned, research-driven portfolio is best placed to capture the next leg of returns.
1 Anton Cheremukhin, “Break-even Employment Declined after Immigration Changes”, Federal Reserve Bank of Dallas, October 2025.
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INDEX DEFINITIONS
The J.P. Morgan EMBIG Diversified Index ─ The J.P. Morgan EMBIG Diversified Index tracks liquid, USD-denominated debt from emerging market sovereign and quasi-sovereign entities, but with a unique "diversification" methodology that limits the weight of larger countries by using a specified portion of their total debt. This weighting scheme allows smaller markets to have a greater influence than in the broader J.P. Morgan EMBI Global Index. The index includes fixed-rate and floating-rate instruments, excluding convertibles and inflation-linked bonds.
The JP Morgan CEMBI Broad Diversified Index ─ JP Morgan CEMBI Broad Diversified Index is a global benchmark for US-dollar-denominated corporate bonds from emerging markets, including a specific range of countries in Africa, Asia ex-Japan, Latin America, and Eastern Europe. It includes fixed, floating, and zero-coupon bonds, excluding defaulted issues, with a diversified structure that caps the weight of the largest country debt stocks to enhance diversification.
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