EM Fixed Income: Seeking guidance into the second half

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 markets fixed income asset class. I'm Ben Ramsey, Head of EM Sovereign Credit Strategy here at JP Morgan, and I'm joined by Ineska Krzysztofowa, Head of EMEA EM and LATAM Local Market Strategy, and YM Hong, Head of EM Corporate Credit Strategy, both at JP Morgan. Ineska, YM, thanks for joining.

Hi, Ben. Nice to be here. Thanks.

So, we are at the mid-year mark, and we've sort of been, you know, taking stock and looking ahead. If we look at the returns across our EM asset classes, they've been solid, not spectacular, kind of consistent with, I'd say, constructive outlooks that we've had, but not over-exuberant. It's been a pretty quiet week.

We're still trying to digest the backdrop here of lower oil prices, but still upside risks to inflation. That's keeping Central Bank's reaction function squarely in the spotlight, I guess, as we're recording this. Chair Warsh has been speaking, and that's probably one of the more interesting developments of the week.

In terms of broader macro framing, we got our global economics team's mid-year outlook over the past week. So, let's take a quick review of that and see how we're thinking about it. First, they still see a cyclical upturn when they look ahead, led by the tech boom, alongside the rebound in hiring and non-tech investment, which they see keeping global growth running above potential.

Second, even if the growth impulse has been tempered a bit by the energy shock, we still see an inflation impulse which is skewed to the upside. And this is tricky, given that inflation has been elevated for several years, and labor supply constraints remain a key issue. And third, in the U.S., it's the interaction of elevated core inflation and a tightening labor market that could bring the Fed back to hiking.

And the door was open at the last meeting. It would probably take the labor market data coming in to beat the Fed's own projections, alongside still firm services inflation to sort of really put the onus on potentially seeing more hikes, or resumption of hikes. And finally, let's think about the FX side.

Our global FX strategists have held on to a bullish dollar view going into the second half of the year. Chair Warsh's hawkish debut added some right tail U.S. dollar support. At the same time, carry has remained a consistent driver of returns, and our global FX team stays constructive on carry into the second half.

So with that, Ineska, let me turn to you. So if we consider this backdrop, which has presented some challenges in the first half for EM local markets, how are we seeing risks on the margin going ahead? And how are you reading our economists' views as they present their mid-year outlook?

Which part of those views are resonating most with you? Thanks, Pence. Well, let me focus on exactly the kind of points you've mentioned.

For me, starting with the cyclical outlook is most important for EM as an asset class. That's always our starting point. And here, it aligns very well with our view that a cyclical uptick or a strong cyclical performance is likely.

What we need to spend a lot of time, though, on is whether that is at the same time as we see U.S. exceptionalism, or what is the degree of U.S. exceptionalism, or rather, is that a synchronized global uptick? That really very much matters for the pressures that the dollar would give the EM asset class. Now, when I look at our economists' forecasts, what I would emphasize is that there is, I would say, no U.S. exceptionalism in the second half of the year or going into 2027.

No U.S. exceptionalism, I mean, it's a judgment of degree, because the forecasts are obviously good for the United States, but not materially higher than for the rest of the world. Let me go through the details, just to mention a few of the numbers that matter. So for the U.S., we have annualized growth in the second half of the year, about 1.5, 1.8 in the third and fourth quarter.

Our economist is writing that the U.S. economy is looking like a 2% sort of ish economy, with a lot of divergence between different sectors, but overall a 2% ish economy into 2027. Now, obviously, that's higher than the euro area, where our economists are looking for 1.0 to 1.3 growth in the second half of the year. But what is interesting is also the direction of this.

It made an impression on me that recently things are shifting a little bit again, more optimistic for Germany with some progress on the reform. There's been obviously a lot of skepticism whether that fiscal impulse that carried us in 2025 is completely over, and it appears it's coming back a little bit into view. And for EMX China, the forecast is very steady to next year.

So for me, what matters is really is that I do not see a large degree of U.S. exceptionalism in these numbers, rather a synchronized global cyclical uptick. Now moving on what that means for policy, obviously, if you don't have very large degrees of growth divergence, you're also very unlikely to get large degrees of interest rate divergence. That's very important, but we would still have to actually learn what the Fed new reaction function is.

We are still learning. As you said, we had the Walsh speech today. The market is not taking it as particularly hawkish, rather more patient.

We also found out a little bit more detail about the dots, which dot belong to who through last week. So our economist forecast is not for a hike in 2026, but we still have to learn the details whether that's indeed the case. Finally, on inflation, that's for me the most difficult point because I agree with the sticky services and rising corporate inflation outlook from our economists, and we see it in many countries.

But at the same time, inflation is surprising to the downside in recent trends. And we also see a large degree of country divergence in those numbers. So we feel this is the more difficult part of the outlook where we have to pay attention to country differentiations and the bottom up part.

So where does it leave us? Without US exceptionalism with more synchronized global uptake, I think that we should be relatively comfortable with EMFX. I don't think euro or dollar is a problem for us unless the moves are very fast or breaking out of ranges.

So that will be the condition. For rates, I think the latest developments on oil are very important. And I think here we really have to go country by country and analyze the inflation outlook bottom up.

Now with that, let me turn to you, Ben. On the sovereign credit side, how are you seeing the strong cyclical backdrop that we've just discussed? Yeah, on our side, and I'll repeat some of the messages that we've been saying on this forum, I think it is that sort of overall growth view, a strong cyclical uplift view, more than some of the nuances, which is, I think, still keeping credit spreads and sovereign spreads pretty well anchored.

YM certainly will get into a bit more in terms of the corporate side on EM. But on the sovereign side, I mean, we've seen, I think, what we've kind of been expecting, a little bit of volatility. We've bounced around 15 basis points up from the very sort of almost all-time tights and sovereign spreads a couple of weeks ago, as the Fed has come back sort of into play and into focus.

But I think our view here is more, again, if the Fed is being forced potentially to move because of the strong growth, and that's what's going to potentially be bringing hikes again forward. That's not in our house call, as you mentioned, yet. But in my view, as long as growth remains strong and there's not sort of an accident on growth, we're going to see spreads still pretty well anchored, perhaps with a bit of volatility, maybe not getting back to those tights.

But I still feel like strong growth means that the overall sort of gravitational pull for spreads is going to keep them pretty well anchored. And you also mentioned that this has been a quiet week, but unfortunately, for one country, there has been a lot of news, tragic news, given the earthquake, and that's Venezuela, which has been a big talking point in our mid-year client discussions given the restructuring announcement. What is the latest, and does the earthquake change the story?

Yeah, as you mentioned, this is really a tragic occurrence for a country which has obviously had a tough couple of decades, if we look at the social outcomes and the economic outcomes there. And it, I think, interrupted what was some optimism in terms of an outlook for an economic recovery going to the second half, led by more Western and U.S. involvement in the oil sector. So, I mean, the human costs and losses are absolutely tragic.

And I think that's first and foremost, but as we sort of think about moving ahead, on the one hand, it does seem like most of the oil infrastructure has been still pretty much intact. So, I guess that's a silver lining, if we think about economic recovery. That said, I think we had a lot of question marks about how this restructuring was going to get rolled out.

We've been waiting for details. We had some information filtered into the press before the earthquake, which suggested we were going to get economic data and a DSA, perhaps as soon as this week, so a debt sustainability analysis. Those things, I think, necessarily have to be put on hold as we assess the starting point here for the economy and what is going to be the needs in terms of focusing on recovery.

So, I think this puts everything on hold, and we're certainly wishing the best for the country until we can sort of get back into focusing on economic side again and the debt restructuring story, which, as you mentioned, has been extremely topical. So with that, let me turn to you, YM. And as we think about the EM corporate outlook more specifically, how are you putting two cross currents together?

First, lower oil price expectations. And second, what still looks like a pretty robust backdrop for expectations around corporate earnings. Thanks, Ben.

Our commodity strategy team, they lowered their oil price forecasts to around the $80 level for this year. So on the back of that, we did make some changes to our corporate recommendations. So most of the oil and gas related sectors we had on overweight given the rise in oil prices after the Middle East conflict.

So we lowered most of those to neutral now, and that is given that those high oil price expectations, which were previously lifting the spreads to very tight levels and also to the best returns for the sector year to date, that's going to moderate. So we've lowered that to neutral. However, we still maintain some recovery stories in our secondary recommendations, including in SEMIA.

So those still remain some of our core overweights, especially in the triple again WB segment, as well as some of the Middle East country segments. In terms of overall corporate spreads, though, we still expect that to be very well anchored, similar to what Ben mentioned in terms of credit markets being very well supported overall. However, for EM corporates, an additional factor is that the corporate earnings are very, very robust.

So in terms of EBITDA growth, we expect about 30% EBITDA growth for EM corporates for this year, which is much higher than the mid to low single digit levels we had in previous years. So there's arguably some concentration in that. So three sectors are leading this kind of elevated growth, industrials led by tech manufacturing and to a lesser extent petrochemicals.

And then we have metals and mining, also lifted by a very strong pricing environment, as well as oil and gas, despite the lower price forecasts for this year. The year over year comparison is still close to 20% higher average prices. So that does lift the earnings for the oil and gas sector.

In these three sectors, we have EBITDA growth in the mid to high single digit range, which is still a pretty reasonable level. So overall, we are very comfortable in terms of EM corporate fundamentals, at least on a standalone level. And that is also leading to a somewhat better credit rating outcome as well in recent weeks.

So we're generally fairly constructive in terms of EM corporate fundamentals. And that is another factor why we think credit spreads should be fairly well anchored at the current rate type levels. Great.

Thanks, YM. Well, that brings us to the end of this JPMorgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Ineska and YM for joining today.

And thank you all for listening. And we hope to have you back again with us for the next one. This communication is provided for information purposes only.

Please refer to JPMorgan Research Reports related to this content for more information, including important disclosures. 2026, JPMorgan Chase & Company, all rights reserved. This episode was recorded on the 1st of July, 2026.