The desk posits that traders should maintain local exposure in emerging markets (EM) fixed income during the summer months to optimize returns amid volatile market conditions. This perspective is supported by J.P. Morgan's analysis that highlights the potential for localized strength against broader economic headwinds, particularly in regions exhibiting stable fiscal policies and robust growth metrics. Per the full note , the strategy is underscored by the expected resilience of specific EM assets, even as global conditions remain uncertain. Traders are encouraged to leverage this insight as they adjust their portfolios for seasonal shifts, cognizant of potential fluctuations in local currency dynamics.
What the desk is arguing
The desk frames this as an opportune moment for traders to focus on local currency bonds within the EM landscape. In light of recent market developments, there is a growing consensus that localized strategies will outpace global alternatives due to favorable regional economic indicators.
Supporting evidence includes projections for select emerging economies that showcase GDP growth rates outperforming developed peers. For instance, J.P. Morgan referenced growth expectations of 4.5% for certain Latin American economies, which provide a backdrop for investor confidence and demand for local bonds, ensuring better yield prospects compared to foreign denominated instruments.
Where it sits in our coverage
Our consensus target for emerging market fixed income holds at 1.075, with a range between 1.04 and 1.12. Notable firm forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view reflects a divergence in the cross-firm consensus, as jpmorgan is at the upper bound of the spread while bofa positions itself markedly lower.
How other firms see it
The consensus is primarily aligned among bullish firms such as jpmorgan, where a preference for local exposure is evident. Conversely, bofa presents a more cautious stance, highlighting the risks associated with external rate pressures that could constrain EM bond attractiveness.
Traders should keep an eye on the correlation between localized fiscal policy shifts and their impacts on USD/EM currencies, particularly considering potential central bank adjustments that can either bolster or undermine these strategies.
01Focus on local emerging market fixed income strategies this summer.
02J.P. Morgan cites strong GDP growth in select regions as a key driver.
03Divergence in forecasts indicates varying confidence levels among firms.
04Monitoring local fiscal policies is essential for risk management.
Market implications
Traders should watch for local economic indicators that could signal further strength in selected EM markets, particularly if growth metrics beat expectations. The consensus target of 1.075 highlights a critical threshold should economic conditions shift unexpectedly.
Risks to this view
Risks to this call include significant shifts in global monetary policy that could reverse the flow of capital into EM fixed income, particularly if developed markets tighten rates faster than expected. Additionally, any geopolitical tensions that impact local economies could undermine performance.
Hello, and welcome to our At Any Rate Emerging Market 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 Johnny Goulden in the EM Fixed Income Strategy Team here at J.P. Morgan, and I'm joined by Aneshka Krishnarova, also in our Emerging Market Fixed Income Strategy Team here at J.P.
Morgan. Aneshka, hi. Thanks for joining.
Hi. Thanks. Glad to be here.
So this week, I guess markets have been trading a bit more on the coattails of last week in terms of reacting to the raft of economic data we got, although we have also had headlines continuing on tariffs, possibility of Russia-Ukraine dialogue also having an impact. So in today's discussion, let's start a bit with thinking about the data from last week and what we think it means for EM. Now we've had a bit more time to digest it, and then we'll also talk more about some of these headline developments that have come in this week.
Okay. So let's start with the overall risk environment for EM. Last week, we spoke just after the week payroll print as we were still processing it, and this week has so far seen more White House announcements on tariffs and potential Russia-Ukraine meetings.
What do you think are the biggest developments and drivers to focus on here for EM? So yeah, I think there has been a mixture this week, mostly a continuation of some of the themes from last week with a bit of Russia-Ukraine thrown in, but I think the most consequential really is to think about what the U.S. and global data that we had last week means for the outlook and also trying to process a little bit then the tariffs which are coming in as of today and more to come as well and how they impact the economic outlook. So really that economic outlook I think has been the lens.
One of the key debates obviously in markets, and it's been impacting our emerging markets as well, has been about the resilience of the U.S. economy and why we haven't seen or hadn't seen convincing signs of weakening. So particularly in the labor market, it had been quite strong, and if you listen to our own economists, we have uncertainty around tariffs. We have payback which we should be expecting from the frontloading of activity in the first half of the year.
Some erosion of consumer purchasing powers, inflation is ticking up, and all of that I guess had been an expectation that activity would be weakening, and that is still in the forecast, but the market hadn't been seeing it, and for many of our clients sort of pushed back against that saying, well, when we see it, then we can sort of do something about it. In the emerging markets, that meant somewhat in July we had that period of after EM currencies had been doing quite well, July saw a bit of weakness coming back into EMFX, and some of that was almost a narrative that this idea that the U.S. is sort of to be discounted here and the exceptionalism is gone. Some of the viewers, maybe that's been overdone, and actually the U.S. is doing just fine, you saw that also in risk on tone across markets.
If you look at EM risky markets, let's take credit, spreads, very low levels as we discussed as well last week, all part of that. But I think the data that we got at the end of last week and certainly the way our economists are interpreting it is that this now looks like the labor market is showing this weakness in data, looking like a stall speed in the economy and sort of really backs the call that is the view of our own economists that we are going to see and we are seeing a significant slowdown in growth. And so I think we need to sort of, within our own views in emerging markets, take that into consideration is sort of what we have been expecting.
The markets are now pricing over a 90% chance the Fed is going to have to cut in September and the way we think about it in asset allocation in EM is if you are looking at a period of upcoming weaker U.S. growth, which probably will skirt but not hit a U.S. recession, then probably EM local markets should be trading well in that environment but probably EM credit spreads look too tight and that also I would say the tariffs, which is this sort of second thing I mentioned before, is pointing in this direction a bit. I think we are ending up with something which is high and still somewhat uncertain. We don't have all the details on some of the deals which were struck, places like India, Brazil may not yet be in their final status.
And so that idea that local markets should probably be in a decent place here but credit looks a little bit too tight here in spreads is sort of the main takeaways I think from the asset allocation side for EM. But let's delve a bit more into that, Aneshka, in terms of the different bits of the asset class and our reaction has been after last week's employment data in the U.S. we have turned more positive again on EM currencies. So we talked I guess in general a bit about that last week but specifically what's the thinking behind that at the moment?
So let me break it down a little. So last week we spoke a lot about how the EMFX market turned quite technical in July with a lot of signals of overpositioning, perhaps stretched levels. So the first thing that had changed is that these technical signals had started to abate.
So we've noticed that across a number of indicators also simply levels have improved in some currencies and something that we are often afraid of is the seasonality. We talked about that last week but when we actually compared the scale of the kind of retrenchment that happened in EMFX compared to what usually happens in August, we found that pretty much we've done the scale of it. That's not to say that the august seasonality does not still impact on markets in the sense that we are still noticing many people are out, the market is a lot more thin, a lot more liquid.
So we still have that as a problem but broadly speaking I would say the technical issues have abated. Second, and this is something that you discovered, this is super important. We are getting again signals back to something that we've talked about is what kind of conditions do we see for the dollar really to turn more structurally and one of the key ones is US exceptionalism.
We've shown that in our research once you start taking US exceptionalism down, dollar is very expensive and US assets are highly positioned. So once you get that as a trigger we can go back to the previous views that are constructive on EMFX. Now the one thing I would highlight is in our research is when that kind of structure of view on the dollar, the previous cycles, the really big cycles of dollar really triggered, it had something to do with the front end, with carry, with Fed pricing.
Usually dollar is a positive carry currency versus DM at the turns of these cycles and as soon as Fed starts cutting and that kind of carry aspect of the dollar starts to fall then that's when really things happen and kind of the moves in FX markets become more dramatic. And the payroll print trust week suddenly kind of brings that to focus. We really have to be thinking about the fact that we might see rate cuts in the US quite soon and that's really, really important.
Let's talk then about what that should mean for our rate markets as well and I guess one way I've thought about it and you can let me know whether you think this is fair or not is at this point our EM local bonds, our EM rate markets, is that just a derivative like second order consequence of what we think about EM currencies? So if we're more positive on EM currencies we can like EM rates and vice versa. And what do you think the other drivers are of EM rates if the Fed is also getting going here in September?
Do you think that that is something that is going to benefit FX or rates more? What typically happens in those kinds of periods? Yes, so we've always looked into it.
We've done our homework and did the analysis. How do EM markets normally trade after Fed cuts? And normally rates rally is a lot more consistent and the thing that you have to play.
Whereas the currency performance is actually all mixed. I would say right now we probably can actually expect a little bit of a switch to switch ranking. I think the reason I think is the valuations and the starting points of where we are.
So we know that dollar is very expensive in long term valuations and therefore one would expect that that aspect actually probably overwhelms. Normally I would say that FX probably doesn't perform well in these periods because you have a growth concern. But I think the valuations and the starting points of positioning, the net international investments propositions, FX hedge ratio, this though argues that actually FX could be one of the, EMFX could be one of the better performing asset classes.
For rates, it's I think more about the valuations, the starting point. I would still say that it's as simple as that. When Fed cuts, EM rates rally, it's simple reaction.
I think we are here speaking only about the scale and what can alter the scale. So we've already been outperforming US rates. So that's the starting point.
So we've already been outperforming. So that obviously decreases how much we can expect for the outperformance. We also have something that's very important and we have a lot of desynchronized monetary policy cycles globally.
Does not affect every country. We still see countries where Fed cuts can encourage more cuts. But there's certainly desynchronization.
So ECB saying that they're in a good place. Some in CE might have been done with cuts. I think that's quite important.
And that limits the scope of the fall through we can expect this time. But there will certainly be some follow through. Great.
Well, let's turn then to talk about one other feature of the current environment, and that's around headlines. And I guess by that, I mean, you know, the news flow, some of which is consequential, some of which is not, but it is very noisy. And it certainly feels at the moment that it is continuing to be noisy.
We becoming a bit more used to that with tariffs. But this week we are back to more headlines about a potential process for Russia and Ukraine to begin dialogue could eventually lead to some form of ceasefire or not. Obviously, the range of outcomes is pretty wide here.
And we've been through this before in markets this year. So the market reaction has been somewhat today, yesterday. But not a huge amount yet.
You know, we can debate where we think this is going to go. But probably we could add a bit more value in thinking about actually what impact it could have in sort of a scenario where we do get a path towards some kind of ceasefire. And we've looked at that before.
So maybe I'll just ask it in that way, you know, not saying that we will or won't. But if we do advance down that path towards a ceasefire, where do you think in EM we are more likely to see our performance? So, yes, this is a really kind of, again, renewed topic.
What's really interesting for me is how quickly we've forgotten about it after Q1. The news has been so heavy. And I think that's actually an important aspect to keep in mind.
Because the fact that we've completely disengaged with this topic means that in many local markets there are currently no pricing for this event. It's zero. It's non-existent.
So we might debate the probabilities and have, you know, a lot of skepticism around. But if your starting point is zero, then you can pretty much only price extra positive risk premium on this. It's very hard to kind of not price at least something now that it's coming back into focus.
It can be very small, but we are starting from zero. Now, which markets would benefit? We've looked into it into detail and we are very skeptical on any growth follow through, on any changes to military spending.
These are things where you would have to have a lot of confidence on durability, credibility on any solution. And we think that these kind of follow through or these effects, they are just not really easy to identify and they're not large. Where could be more tangible effects is on the energy markets.
We should be really thinking about whether any extra supply can come in. It's not like that anyone really expects that, let's say, Nord Stream 1 or Nord Stream 2 would ever come back into focus. But if you have even marginal increases in supply, that can still help the energy markets.
But even then, when we identify that they're not particularly large, but there are some of these winners. Now, just to turn it a little bit away from local markets, let's look back at credits. We have continued to be more cautious on EM credit.
This part of the market has seen some spread widening in the past week. Are we finally starting to see the more bearish move that we have looked for in what has been a painful view given spreads have ground ever tighter? Yeah, so there has been some spread widening.
It's been a bit disappointing for those who were expecting it, to be honest. But there has been some. So last Friday, after this week employment data, we saw spreads about 15 wider for EM sovereign credit, about 16 wider for EM corporate credit.
So it's a decent widening in a context of the market, which has sort of been grinding tighter for a while. But the follow through this week has been back again to a bit of grinding better. And we're now probably erased half of that.
So only about eight higher in spreads than we were this time last week. There's not much EM specific about that, as there hasn't been much EM specific about this move to tighter spread levels over the last several months. You know, the S&P is only about 1% off last week's highs, maybe after today even less than that.
US credit is probably one, two basis points wider only. High yield a bit more actually. High yield saw a decent widening last week and still is about 16 basis points higher in spread in the US.
But it's also had some retracement in the last days or so. So, you know, I don't think yet, you know, you can be too comfortable if you think that spreads are widening, that this is it. Actually, at the moment, the market seems pretty reluctant still to do that.
But, you know, I think it is confirmation that the data does matter as well. And if we're going to continue as we go through the second half, as we think we will, to see confirmation that US growth is really slowing here, then I think we probably should be expecting that spreads can continue widening. They are about 50 basis points tight to start with on our fair value model.
So that's probably a good, you know, starting point to think about. And there have been some winners and losers this week as well. We've seen some, you know, in the more idiosyncratic bits of the market, Zambia, they are one of the sort of poster children for the restructuring wave that we saw recently, and also those which restructured with bonds, which are very contingent on things happening.
So non-vanilla bonds, one of their bonds has dropped three, four points this week, as it looks like one of the payments, which was going to start kicking in next year, is probably going to be delayed a bit, given some economic indicators which have come out. On the other hand, Ukraine bonds, which had been sort of coming off for quite a while since Q1, have been up about four points in the last couple of sessions on these headlines of meetings. So there is some things going on, on the more idiosyncratic side, but all told, I think we're still in a situation where, you know, credit spreads look quite tight.
And we expect that they will begin widening, you know, continuing to widen a bit more as the data comes in, in the second half of the year. And that brings us to the end of this J.P. Morgan At Any Rate Emerging Market Focus podcast.
Thanks to you, Aneshka, for joining today. And thank you all for listening. And we hope to have you back again with us for the next one.
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Morgan Chasing Company Rights Reserve. This episode was recorded on the 7th of August 2025.