Summary
Supportive macro backdrop
Although the growth premium for EM is nearing its peak, it still favours EM, with a significant growth differential expected for 2025 and beyond.
The Global macroeconomic outlook is supportive for EM prospects, with global growth remaining resilient and inflation generally on a declining trend. EM appear more resilient.
Although the EM growth premium is peaking and moving closer to the historical average, it still favours EM, albeit with increasing fragmentation and divergence among countries.
Easier monetary policy
EM central banks have already initiated the easing cycle and are expected to continue this trend, with few exceptions
EM Central Banks adopted a more orthodox and agile approach in 2022 by raising interest rates and curbing inflation, positioning themselves favourably for the current easing cycle. The Fed's ongoing easing cycle creates a favourable environment for balancing growth support with vigilance against inflationary risks for more autonomous EM countries.
Winners & losers: Asia in focus
Asia will continue to be a major driver of growth, with China's fiscal stimulus being a key variable to monitor.
Asia plays a crucial role in shaping the future of the global economy, thanks to its rapid economic growth and leadership in technology and innovation. India’s economic outlook remains solid and promising. Meanwhile, in China, new stimulus measures aim to reverse the structural economic slowdown. While Southeast Asian countries have strengthened their trade positions.
Risks to watch: US elections
One important theme to watch is the US elections and the impact of potential new wave of tariffs.
The key risks to watch are geopolitics and the US election. A possible Trump 2.0 is a significant factor influencing the outlook for EM. Idiosyncratic stories and internal vulnerabilities, which could increase EM fragmentation, are other topics that investors need to monitor.
Main investment convictions in EM
- Constructive on HC space amid a supportive macro backdrop and attractive yield, with a selective preference for HY over IG.
- Local Currency debt could also benefit from more dovish EM CB's. We remain focused on areas with appealing real yields.
- Mildly positive on EM equities, with focus on areas with attractive valuation, stronger economic growth and an earnings recovery is on track.
- Selective EM FX still offers good carry, and Fed's easing stance should lend support to EM currencies.
- Light positioning should offset uncertainty from core rates and geopolitics.
Authors
