Emerging market fundamentals remain robust, but broader global macroeconomic developments are leading us to a more selective approach to positioning portfolios.
Despite our reduced conviction in a weaker USD for 2026, we believe emerging market (EM) local-currency bonds remain well-positioned. Ongoing disinflation in EM economies not only supports EM currencies but should also enable some EM central banks to cut interest rates in 2026. We believe EM FX can perform well even with a sideways USD given the healthy state of external accounts in most EM countries.
For all the shifts in macroeconomic risk factors that swayed market sentiment last year, most credit markets delivered on expectations for carry-driven returns in 2025. Emerging market (EM) debt was an exception, recording strong excess returns in addition to carry driven by supportive market technicals along with fundamentals that have withstood macroeconomic risks.