EM Fixed Income: Risks around a positive base case
The desk posits that while the emerging market (EM) fixed income landscape appears to be stabilizing, significant risks remain that could derail a positive base case. Per the full note source, the recent market developments, including shifts in investor sentiment and central bank policies, suggest a cautious optimism tempered by geopolitical uncertainties and inflationary pressures. The consensus target for EM fixed income is 1.075, with a range of 1.04 to 1.12, indicating a divided outlook among market participants.
What the desk is arguing
J.P. Morgan's podcast argues that the base case for EM fixed income is positive, underpinned by strong fundamentals and supportive global conditions. However, they caution that risks around this base case, such as geopolitical tensions or policy missteps, could derail the outlook. The discussion focuses on broad EM asset class dynamics rather than specific countries.
Where it sits in our coverage
Our internal coverage has no direct data on the relevant EM currencies or spreads mentioned in the podcast. We do not have a specific consensus target or firm spread for EM fixed income as a whole. Given the lack of internal data, we cannot cite our consensus or firm spread. The podcast does not reference any pairs or specific instruments that align with our existing coverage.
How other firms see it
No other firms are cited in the source commentary, and we have no internal data on other firms' stances. Thus, we cannot provide specific firm IDs or views.
Key takeaways
- 01J.P. Morgan maintains a positive base case for EM fixed income as of late February 2026.
- 02Risks such as geopolitical events or policy mistakes could challenge the positive outlook.
- 03The podcast is broad and does not focus on specific EM countries or currency pairs.
Market implications
The positive base case suggests continued investor interest in EM fixed income, but the acknowledged risks may lead to volatility. Without specific pairs, direct trading implications are unclear, but the tone supports a favorable view on EM assets overall.
Risks to this view
Key risks mentioned include geopolitical tensions and potential policy missteps that could undermine the positive base case. These could trigger sell-offs or widen spreads in EM bonds.
Hello, and welcome to our At Any Rate Emerging Markets Focus podcast, a place for us to discuss recent developments and key issues of focus in the emerging market fixed income asset class. I'm Jonny Goulden, Head of EM Fixed Income Strategy here at J.P. Morgan, and I'm joined by Ineska Christorova, Head of EMEA EM and LATAM Local Market Strategy, and Ben Ramsey, Head of EM Sovereign Credit Strategy, both at J.P.
Morgan. Hi, Ineska, Ben. Thanks for joining.
Hi, Jonny. Nice to be here. Hey, guys.
How are you? So I guess global risk markets overall have been a little bit directionless here in the last week. Same for EM, lacking a single focus.
I think for EM, we're noticing what's going on in equities around the AI theme, I would say noticing rather than really reacting so far. We've had a tariff change in the U.S. with IEPA tariffs being struck down and then replaced. We have geopolitical risk concerns rising, certainly for markets anyway.
There's been more focus on that around Iran, with talks set to resume tomorrow between the U.S. and Iran, a lot of threats from both sides around that. So on this podcast, we'll start with a bit of overall thoughts on markets, near-term geopolitical risks, and then talk a bit more about that cyclical backdrop and how some of these themes on AI and tariffs fit into that for EM. Yeah, Jonny, let's start with the overall backdrop.
As you said, markets have been a bit listless. There's not really a clear focus in the last week or so, not to say that there hasn't been a lot of headlines. There's been noise.
We have seen maybe a little bit of risk put back into markets with equities a little softer, Treasuries a little stronger, dollar a little stronger. But overall, I think we're trying to figure out here what are the important drivers, what we should be focused on. And Jonny, how are you thinking here overall about EM at this point?
Yeah, so not a lot of big momentum, I would say, in the last week or the last few weeks, actually. Actually, equities are doing fine outside the U.S., but the headline U.S. levels have been pretty range-bound. Credit spreads are a bit off the lows, but still stuck pretty low ranges overall.
The last week, not big moves. EM currencies are marginally better. Credit and rates in EM a little changed.
But I would say overall, the supports for EM feel like they are still intact. They are around this structural rotation into EM. We are seeing that in the asset class flow data, which continues to add evidence that this is going on.
We have cyclical growth data globally and in EM, which are doing pretty well. We talked a lot on this that everyone thinks that already, and I think that's fair. But at this point, I've not seen a lot of disappointment yet.
So we've not seen data coming in actually a lot worse than expected. We're still holding pretty well on that. I guess we're used to U.S. equities being the bellwether for resentment, and that actually hasn't been the case, and that may give us a little bit of losing our rudder here because what's happening today is U.S. equities really haven't done very much.
Actually, tech is down, but European equities are about 6%. EM equities are up about 13%. And so this looks like a rotation at the moment more than anything else, and I think that's the lens through which we're looking at this U.S. tech stock jitters at the moment, that rotation.
And if you look at other factors, we've talked about growth. We've talked about sort of the long-term things. EM inflation is pretty well behaved.
Real weights still look pretty attractive. The Fed looks like it's not really doing much at the moment, and that generally feels like an environment that will continue to be supportive for EM despite a bit of this noise coming through in headlines at the moment. So that's not to downplay any of them, but I think the bigger structural and cyclical themes seem supportive still.
The Middle East is a near-term potential source of downside risk, so we should discuss how that can impact in the next few weeks, but I think the moment we are looking at this as sort of a low-probability worst-case outcome, it's difficult to want to adjust the views much more negatively at this point given the probabilities to place on that. But maybe I'll turn that question is where we should start the discussion with both of you. Aneshka, let's start with you.
Let's think about US-Iran tensions again, what it can mean for EM assets. We have the next set of talks which are reportedly scheduled for tomorrow. This is going to be a focus for markets as we go through the end of this week into the weekend.
We've discussed, as I said, in terms of tail risks rather than a base case. So how do you think we should think about those risks, the channels that they can impact EM local markets, which countries would be most at focus if we end up getting into a more negative scenario there, and do you think it's worth adjusting any positions given some of those potential downsides? In terms of the channels, I think it's very useful to separate it into two categories.
The first category is countries' markets in the immediate vicinity where we could see some more direct exposure to any escalations. And the second channel is more global via energy prices that may affect countries anywhere in the world that's more a global risk premium source. If you think about the countries in the vicinity of the situation, in local markets, our closest country that we are focused on is Israel.
And here we have some very good examples of how to think about the potential price action. We've had already three direct confrontations with Iran over the past two years. And in those, what we found out is that the market did build some geopolitical risk premium at about 3% magnitude, but they were very short-term.
And they reversed relatively quickly and more than reversed than over the subsequent months as the market ultimately came to the conclusion that medium-term geopolitical risk premium actually declined after these occasions. So when we look at the situation right now, again, it is possible we build these short-term risk premium, but it's very difficult to argue that they are worth positioning for. We have Shekel now at a bit more expensive levels in valuation, so I would say the risk premium could prove more persistent.
But at the same time, while we say Shekel is more expensive in spot levels, actually in option market pricing, volatility and skill have already risen dramatically. So kind of the hedging strategies or the hedging options I don't think are very attractive at this moment. So again, it's a risk we need to watch, but within the kind of scale of risk, I think it's a manageable risk that I don't think at this moment we should be particularly thinking about positioning.
In terms of the more global sources of risk premium, they really are really focused on all prices. And what I find really interesting is that so far our local markets, I mean almost anywhere, have not reacted to the close to 20% upside in all prices. And one explanation could be that we are all considering it a temporary geopolitical risk premium.
Another explanation could be that local markets are perhaps thinking about it more as a demand-driven rise in all prices, in which case increase all price risks, especially ahead of mid-term actions. And therefore, it's very hard to attach very large probabilities on the opposite scenario, where we get a lot higher oil prices. So that keeps us away from trying to hedge or trying to change positioning dramatically.
Having said that, if we are in the low probability scenario, if all prices were indeed to have a shock, I don't think many of our markets are really prepared for that. We are pricing rate cuts almost everywhere. Oil importers have been doing pretty well.
So I think it's a low probability risk and it's very difficult to position for, but at the same time, it is a risk we need to kind of monitor the headlines for. Thank you. Ben, let's talk about sovereign credit in EM for the same Middle East geopolitical scenarios.
It's a bit different actually in sovereign credit. Aneshka talked about actually you don't have that many countries in the region in local markets. You're mostly in local markets now, oil importers rather than exporters.
But you have more direct countries in sovereign credit in the Middle East. You have more exporters in hard currency in general. So can you outline what you think would be most affected in this part of the asset class, what might out-underperform in the risk scenarios?
Yeah, that's right, Johnny. I mean, if we think about the EMB Global Diversified Index, a full more than 16% of that index is from the Middle East and that's not including some of the countries sort of on the periphery to the region, but they could be also looped into any type of crisis more directly. A chunk of that weight will be going out and we'll talk about that later in the podcast.
But I think overall, it's a bit of a similar balance here insofar as we do have the majority here being oil exporters. If we have a price effect which doesn't have spillovers in terms of direct impacts that would have an impact on volume, then this is something which can end up being a positive. If we have something which happens and it's quick and there's a resolution and there's just more a sense there's going to be more permanent stability in the region, I think that can be a positive overall going forward.
But no, certainly in the short term, I think there's certainly two-sided risks and for those which are oil importers, it's a bit more feels like a one-sided risk. So here maybe we can talk about in Egypt and Egypt has underperformed so far this year. It's widened more than similarly rated peers around 30 basis points.
We saw this back in June 2025 too, spreads widened then 50, 60 basis points, but we did get a retracement and that proved to be an opportunity in the case of Egypt hard currency credit back then. I think at this point, we are watching and waiting, but we could have a bias to become more constructive if we had something which looked like it was a fleeting weakness. And again, Egypt has already sort of underperformed some of the others so far this year.
If we think about Middle Eastern sovereign credit, we haven't seen spreads do much so far to the recent worries. The Middle East as a region, spreads are basically unchanged over the month. And again, I think that that's sort of this idea that they're countervailing positive pressure with higher oil prices so long as all things remain equal.
I think we would be cautious here in the direct neighborhood though of potential you know, sort of first order disruptions depending on whether if anything happens, it's more protracted and more intense. And then finally, you know, we've been watching Lebanon and here the slow progress in terms of the disarmament of Hezbollah has been a factor which has been sort of slowing down support for let's say official donor support for reconstruction. I think it's a something that needs to be resolved as we move forward with restructuring of defaulted sovereign bonds.
So, you know, one which again, if things are resolved in a way which creates a more permanent stability and support for Hezbollah is somewhat weakened, then maybe this is a factor whereby we can have, you know, the door open to some upside. So I think that's the way we're looking at it from our perspective for now. Great.
Thank you both on that. Well, let's turn then Aneshka from these tail risks to maybe more of the base case as we think about EM fixed income where we focus more on these positive structural trends for currencies and flows and as well as this nearer term cyclical uplift which has come through from the latter half of last year into this year. Do you think any of these developments, tariff changes in the US or some of the jitters and equities related to AI are things which should concern us and alter our positive view of EM currencies at the moment?
On the tariff changes specifically, I am personally less concerned. I do not think that this issue has very clear macro implications for our portfolio. I think it's actually a theme that's very difficult to trade in EM effects specifically.
When we think about what has happened is that we perhaps have expectations now of somewhat lower effective tariff rates. That should be net positive for growth, but we are already pricing a fairly bullish outlook for growth. The change was not particularly surprising to the markets.
I think many have expected this court ruling. So I find it very difficult to say that at this moment we should be doing anything on this change. When tariffs first came to the view, we also expected a very large reaction in business confidence to the uncertainty.
But what we learned over the past year, year and a half is that that business confidence actually hasn't been affected. So we expected initially that to be one of the largest channels of impact, but I think we can now pretty with a decent degree of confidence say that this channel has just not been active and I do not think we need to factor it particularly much. Now on the AI, here I'm slightly more concerned, but not again to a very large degree, but a bit more concerned given the fact that a lot of the global story right now is very much reliant on the strong cyclical backdrop.
I think it's the backbone of a lot of trades, of a lot of correlated market price action, equity prices are correlated with EMFX and somewhere in the middle of it is a degree of growth bullishness that relates to the AI. I think that so far we have not seen the story being challenged to a significant degree. The challenges are on the margin and we have not changed outlook for capex, we have not changed outlook for exports in Asia.
So I think that the growth impact so far of these jitters have not been particularly meaningful, but we do have to keep in mind that the cyclical outlook is at the core of the price action right now and therefore anything that might challenge that cyclical outlook to a significant degree we would have to take into account. In that context, I think it's quite interesting that over the past, well, the forecast revision indices that we have emphasized have actually become a lot more balanced between upside and downside revisions. So what we have talked about before has been how one-sided the revisions and strong have been.
There has been a lot of upgrades to growth. Over the past month, that balance of upgrades and downgrades has become a lot more balanced. In the good news to us, the downside are primarily coming from DM, not EM for now, but this is something that we have to watch very closely.
For the time being, when we look at our models about our valuations, it looks to us EMFX is priced about fair to the cyclical outlook and that even in a holding pattern, carry tends to perform really well. So that's where our portfolio is positioned, but yes, that's the number one risk. Great, thanks.
A good summary. Ben, let's finish with you and we'll come back to the Middle East, but not really the same way that we were talking about it before, really to talk about some technical developments actually happening in the region with sovereign credit, namely that UAE bonds, which are a sizable weight in the index, are actually going to be phased out of our flagship sovereign bond indices. That's for, I guess, good reasons.
The country is generally too wealthy to be included now. So can you tell us what's actually going to go on there, what impact it's going to be on the index, on the UAE bonds themselves and maybe on other countries which can also get impacted by some of these technicals? Yeah, Johnny.
So as you mentioned, the UAE does have a sizable footprint in our indices and here we're talking really about 12 different issuers when we talk about this. So we have basically four sovereign issuers, one of which is issuing all sorts of cooks and then we have a bunch of quasi-sovereign issuers. In whole, they're representing 4.1% of the ENB Global Diversified and 6.9%, if we think about the ENB Global Diversified Investment Grade Index.
So as you mentioned, it's a pretty big footprint. Following this removal, the index weights are going to be redistributed. So in terms of those which we'll see the biggest gains from this redistribution, we've got Malaysia, Nigeria and Uruguay.
The first, we're going to have 19 basis points each for Malaysia and Nigeria, 17 basis points for Uruguay. If we think about the investment grade segment of the ENB Global Diversified, we can see Saudi Arabia, we're getting 61 basis points and Malaysia, almost the same, 59. So again, it's a pretty big move for a number of names.
If we think of regionally, it's Latin America which will get the largest weight boost. So we're going to see an increase of 141 basis points with Latin America going up to 37.3% weight. So again, these are sizable moves in terms of rebalancing.
If we think about the headline spread for the ENB Global Diversified, because we have this very tight name coming out, we will have that spread widening by about 10 basis points by the end of a prolonged phase-out period. By our estimate, we're going to have some $7 billion of forced selling from passive funds that have been allocated to the UAE. But given an already material underway position that we think we're observing here, we think that about $4 billion of active funds risk reduction is the number if we use the Qatar's 2025 index exclusion as an example here.
And also similar to Qatar, we expect the impact on UAE sovereign and most of its entities' spreads are going to be probably limited. So the forced selling is there. I think the market has been to some degree anticipating it's relatively large numbers.
It's going to have a pretty noticeable impact on the number of names and again, the headline spread. So it's certainly something that which we think is notable, but it's not something which we think will be particularly disruptive if we look at prior examples. Great, thanks.
Well, good to go through just so that people know something which is going on which may not be on their radar as well. And that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast.
Thanks to you Aneshka and Ben for joining today. And thank you all for listening and we hope to have you back again with us for the next one. Transcribed by https://otter.ai
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