Emerging market fixed income remains attractively valued relative to other fixed income sectors, driving strong crossover demand and inflows that we expect to continue. Index yields are near the top of their 15-year range, while hard currency EM sovereign and corporate debt indices have delivered high single-digit annualized returns over the past three years. A stable or weaker US dollar would provide a significant tailwind for EM debt, a backdrop that has largely been absent over the last decade.
There are also several potential catalysts for further upside, including easing geopolitical tensions, ceasefire agreements and stabilization in China. In this environment, we believe the backdrop remains supportive for EM sovereign and corporate dollar-denominated debt. Local currency debt should also benefit over the long term, although periods of dollar strength could create short-term volatility.
Despite the uncertainty of potential tariffs, growth prospects for countries such as Mexico and Poland are likely to improve, led by a pick-up in near-shoring and friend-shoring activities as well as in foreign direct investment, as businesses adjust their global supply-chain strategies. As per IMF forecasts, annual growth in emerging markets is still expected to be stable around the 4% mark (see Figure 5 below), despite a projected slowdown in the US economy. China’s growth has remained resilient despite trade tensions, and commodity prices have stayed elevated even during slower growth periods.
