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Emerging market debt: Will strong fundamentals drive resilience?
Compared to the beginning of the last Trump administration, we think emerging markets are well positioned to overcome potential challenges.

This article is an extract from our Q1 2025 Active Fixed Income outlook.
After a turbulent few years, we think emerging market debt (EMD) has weathered the storm and a broad range of factors mean the asset class is in our view positioned well to perform despite a complex global picture.
Compared to the beginning of the last Trump administration, we think emerging markets are well positioned to overcome potential challenges. After a turbulent few years, we think emerging market debt (EMD) has weathered the storm and a broad range of factors mean the asset class is in our view positioned well to perform despite a complex global picture.
The past: what just happened?
After a solid 2023, EMD showed tremendous resilience in 2024, despite facing multiple headwinds from rising US government bond yields, geopolitical tensions, uncertainty around US politics, and persistent outflows.
Hard currency debt delivered another year of total positive returns, with the sovereign index witnessing 8.0% returns and the corporate index experiencing 8.3% returns.[1] Carrying on the theme from 2023, returns in 2024 were driven by high yield issuers across sovereigns and corporates.
Investors appeared attracted to the rewards for taking risk against a backdrop of improving fundamentals and resilient global growth.
In contrast, EM local currency significantly underperformed the wider asset class owing to a strong US dollar, displaying -0.6% (USD terms)[2] in total returns.
The present: spread compression
Within EM sovereigns, spread tightening was the major driver of total returns last year, with hard currency sovereign spreads tighter by c.63bps (including Venezuela)[3]. Even though spreads appear expensive at the headline level, there remain pockets of value that could provide upside opportunities.
Several sovereign issuers have defaulted and as such continue to trade with a premium, which we expect will tighten over the next 12 months. In addition, rating improvements through the year could continue, given the positive tone of several ratings outlooks. We think this will continue to enhance access to capital markets, lowering refinancing risk in many high yield issuers, as we saw with Nigeria last year.
At a broader level, we expect spreads to be supported by strong macro fundamentals in emerging markets. Growth has been resilient in the aftermath of Covid-19, averaging over 4% over 2022-24, higher than 2019, and compared to under 2% in advanced economies. Price pressures continue to recede, particularly in countries experiencing high inflation. Globally speaking, EM government debt levels are just 5% of GDP higher since the pandemic, and remain below 70% of GDP overall, compared to nearly 110% of GDP in advanced economies.
That reflects broadly stable fiscal deficits – below 5.5% of GDP over 2022-25. Meanwhile, the external sector remains in surplus at an aggregate level, aiding rising levels of foreign exchange reserves of around $11 trillion. The latter are more than double the level of external amortisation due in 2025[4].
We think spreads could also be helped by supportive technicals in 2025. In EM sovereigns, net financing is forecast to be just over $3bn, down from c.$40bn this year[5] . Further, with improved growth expectations in the US alongside a rate cutting cycle, US high yield and investment grade spreads should remain anchored, which could in turn support EM spreads.
Meanwhile, returns in EM corporate credit have been led by spread tightening of c.74bps last year[6] owing to strong fundamentals, falling default rates and net negative refinancing. These trends are expected to continue into 2025 with default rates falling to 2.7% (as per JP Morgan estimates). And although spreads are currently close to post GFC tights, all-in yields remain attractive.
As things stand, the risk structure, low duration profile, and exposure to diverse countries EMD offers can in our view deliver diversification and we think this will continue to support demand. Sector selection remains key - tariffs from the incoming Trump administration will negatively impact some industries while other credits will benefit from nearshoring.
As such, we do not see a scenario where spreads blow up significantly in EM sovereigns or corporates, but current levels suggest they could remain relatively range-bound next year.
What could go wrong?
We think the biggest risk for emerging markets does not stem from idiosyncratic factors, but rather developments in global macro and markets. Herein, the key will be the extent, duration and sustainability of policies under the incoming Trump administration, particularly with respect to tariffs, immigration and US public finances. Together, these policies could impact US inflation, global trade, supply chains, private investment and US monetary policy. Coupled with higher rates volatility, this could impact flows into the asset class.
Beyond macro, political noise in emerging markets is expected to decrease due to a light election schedule this year, while the incoming Trump administration has committed to ending conflicts involving Russia, Ukraine and Israel. If successful, this would help lower geopolitical risks, although there is potential for higher tensions between the US and China and Iran.
Outlook
In our view, the global growth outlook remains favourable. EM fundamentals are robust, as evidenced by rating upgrades, high levels of external liquidity, increased market access for high-yield credits, and low default rates among sovereigns and corporates. Compared to the first Trump administration, EM sovereigns and corporates are now better positioned, having navigated two wars, the Covid-19 pandemic, and an aggressive rate hiking cycle since 2016. Given our expectation of EM spreads being range-bound, coupled with rate cuts in the first half of the year in the US, we expect EM hard currency total returns to be in the region of mid to high single digits for 2025.
Read our full Q1 2025 Active Fixed Income outlook.
Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.
[1] Source: JP Morgan indices as at 13 December 2024.
[2] Source: JP Morgan indices as at 13 December 2024.
[3] Source: JP Morgan indices as at 13 December 2024.
[4] Source: JP Morgan indices as at 13 December 2024.
[5] Source: JP Morgan estimates.
[6] Source: JP Morgan indices as at 13 December 2024.
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