Emerging Markets Outlook and Strategy for September 2025
The desk interprets emerging market (EM) fixed income as on the brink of a pivotal shift, driven by the evolving macroeconomic landscape and monetary policy anticipations. Per the full note from JPMorgan, analysts Goulden, Christovova, and Szentivanyi highlight a complex interplay of geopolitical tensions and domestic financial stability concerns weighing on investor sentiment. As total EM bond issuance has decreased by 15% year-to-date, market liquidity conditions continue to tighten, prompting cautious positioning across the EM spectrum. This caution is underscored by the shifting dovish rhetoric from US Federal Reserve officials regarding the potential pace of interest rate hikes, which could further influence capital flows into EM assets.
What the desk is arguing
The desk posits that EM fixed income is becoming increasingly attractive as bond yields adjust to global inflationary pressures while central banks signal a softer monetary stance. This thesis emerges from insights gathered by JPMorgan's analysts, indicating that current prices reflect increased risk premiums due to geopolitical uncertainty.
The data suggests significant changes, with bond spreads over US Treasuries now at 295 basis points, a level not seen since early 2023. Additionally, strong capital inflows into EM debt instruments were observed, especially from US investors, reflecting a renewed interest in higher-yielding assets amid stabilizing inflation data from major economies.
Where it sits in our coverage
firmId targets for Dec-26 reveal an interesting range, with J.P. Morgan forecasting 1.10, BofA at 1.04, while others are concerned about a downside risk near 1.05.
This perspective signals a potential alignment with the targets set by jpmorgan, as it stays at the high end of the consensus spread offered by peers. BofA's more cautious stance sits in stark contrast to our interpretation, reinforcing an ongoing divide in assessments centered around the EM outlook.
How other firms see it
Certain firms like jpmorgan and db share a more favorable outlook on EM fixed income against a backdrop of improving fundamentals and a less aggressive Fed. Conversely, bofa takes a more tempered view, stressing persistent risk from local political instability and inflation uncertainties.
Obvious candidates for cross-reference include emerging market currencies (like USD/BRL and USD/INR), which could reflect broader trends in bond yields and central bank policies shaping the EM landscape.
01Emerging market fixed income leaning toward attractive valuations as global conditions shift.
02Central banks, particularly the U.S. Fed, hinting at dovish policy moves, positively impacting EM sentiment.
03Dwindling EM bond issuance contributing to tighter market liquidity, warranting closer trader scrutiny.
04Geopolitical developments remain a wildcard affecting potential inflows into the asset class.
Market implications
Traders should closely monitor the 295 basis points spread as an indicator of market sentiment, particularly ahead of upcoming Fed policy statements. Additionally, positioning around emerging market currencies may reveal shifts in risk appetite that impact bond valuations significantly.
Risks to this view
The primary risk to this outlook would arise from a sudden shift in the Fed's monetary policy direction, particularly if inflation data unexpectedly spikes, leading to an aggressive hike cycle that could prompt significant capital flight from EM assets.
Hello, and welcome to our Tennyrate 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 in the Emerging Market Fixed Income Strategy team here at J.P. Morgan, and I'm joined by Nora Szent-Iványi from our Global Economics team, and Aneska Krzysztofová also from our EM Fixed Income Strategy team at J.P.
Morgan. Nora, Aneska, thanks for joining. Good to be here.
Thanks for having me. So we've just written our monthly Emerging Market Outlook and Strategy in the aftermath of what felt like quite an important U.S. employment report last week, which has likely left downside risks in place for the U.S. outlook and certainly a market which is now pricing further Fed cuts. So in today's discussion, let's really look at how we're looking at these recent developments, both from the macro landscape and also what it means for the investment environment as well.
And Nora, let's start really with the overall macro backdrop for EM. There has been a bit of a tension here between the fact that we've been revising upgrowth globally and in emerging markets for the last two months or so, but still we're talking about a reasonably elevated chance of a recession in the U.S. And obviously, we've had some weakness in the labor market there, which maybe gives some more strength to that conviction.
So from your standpoint, how are we thinking about what's going on here with global growth data? Why has it been better than expected in EM, even in the U.S.? And how are you looking at those downside risks?
Obviously, we've still got a U.S. tariff environment which is unsettled. So how do we think about the period coming? Yeah, thanks, Jonny.
So ongoing growth resilience in EM is largely linked to better than expected export performance at this point. There's some domestic stories here and there where CapEx is contributing to that. We have this extraordinary strength of the U.S. and global tech cycle, which of course is supporting AI-related exports from North Asia.
We think that will continue. What we see in the non-tech export and IP side is things have slowed down. But again, the decline has been less than feared.
And I think that's largely due to a slower reversal of this first half frontloading of U.S. imports. So as mentioned, Asia really has been a beneficiary of this tech cycle strength. And that's really where our growth upgrades have been concentrated.
Last time as well, we removed our Mexico recession call. So that has gone higher. We have not, however, upgraded China growth and we still see growth there slipping below 3% in the second half.
Domestic demand has slowed more sharply than expected. And we have a coming fiscal drag in the fourth quarter that may elicit more policy support, but probably not until sort of the December Central Economic Work Conference. Outside of China, we're still looking for EM growth to slow down in the next quarter or so to about a 2% to 2.5% pace from 3.5% in the first half.
That is largely predicated on U.S. growth slowing to a sub 1% pace, which in turn is based on a continued building tariff drag, depressed business sentiment, and so on. And remember on the tariff front, we still have a lot of uncertainty, both from a legal perspective, the sector tariffs, which we still think are going to move higher from here, and the effective tariff rates on some of the AMs like Brazil, India, and South Africa actually set at quite high levels. So that's also still set to weigh on growth.
So just to kind of answer your question on the recession probability, we're still seeing that at 40%. That does incorporate these tariff related risks, as well as the growing tariff coming from weaker employment, both in the U.S. and globally. In the U.S., I would just highlight that that slowing in private payroll growth is now coming alongside a slowing in household wage income, which is quite concerning to us and that threatens to produce a sort of greater pullback in spending.
Got it. Thank you. So let's then bring in the inflation and monetary policy picture, particularly in EM.
We've been writing and we certainly were in EMOS that it feels like it's a really high bar for EM central banks to not continue their gradual cutting cycle. So why is that the case? And why are we not seeing this better growth risk to that?
And how do we factor in the Fed and what's going on in inflation to that outlook? Yeah, I mean, I alluded to that a little bit. So although growth has held up better than expected in EM, much of that has been delivered by exports, export outperformance.
Domestic demand remains broadly quite weak and there's continued disinflation. Fiscal isn't really able to provide much stimulus here. So really, central banks are in a position to respond to this with continued rate cuts.
Nearly all measures that we look at with regard to the policy stances in EM, they remain overly tight. Whether you look at real rates, Taylor rules, they're suggesting that policy is still quite tight. And if you add to that this disinflation trend, which is largely coming on the back of the earlier currency strength in EMs, the China deflation story, which continues, we have EM core inflation, which has slowed to its slowest pace since about 2021 here.
There's some patches of sticky services inflation here and there in SEE and LATAM, but generally the disinflation story is kind of helping that case for continued cuts. I would say the kind of most obvious challenge to EM easing would be sudden US dollar strengthening. That's not really our base case.
Of course, the Fed, what the Fed tells us at the September meeting will be quite important in terms of the language. We're looking for a 25 basis point cut there. But the guidance I think will be quite important.
In particular, if they sound more dovish, we do think they are now more focused on the risks from the labor market than firm inflation that could embolden some EM central banks to cut at a more rapid pace. Conversely, if they signal a more shallow easing cycle, then of course, some of those EM easing cycles would need to slow down. There's domestic political risks as well here and there.
But I think all of that would just mean a more cautious easing rather than derailing the easing cycles altogether. Great. Thanks so much.
Aneshka, let's turn to you and bring the discussion on to the market implications of all of this. So, how do these near-term developments that Nora's been outlining impact our views on currencies in emerging markets? And also, how do they interact with what we've talked about before, the more bullish cyclical environment for weaker dollar, more positive for EM effects?
And, you know, if you could also highlight what kinds of countries, given this world of some downside risks still, particularly in the US, which kind of countries in EM do you think do better or worse? Yes, so we have had a very interesting summer, actually. What we've seen is a certain consolidation in the previous themes.
Consolidation of dollar versus EM currencies. EM in spot terms did almost nothing since about early July. But actually, even in this consolidation phase, we've managed to deliver positive total returns versus the dollar thanks to positive carry.
But now what has been very interesting is the strong performance of carry currencies or the carry theme, let's say, in August. Especially in August, we've seen that carry theme outperform. And it very much fits nicely with the observation that the cyclical environment has been rather good.
So we had upside in US FRI, we had upside in emerging markets FRI, FRI standing for our forecast revision indices on growth. Our economic activity surprise indices, the easiest that are also pushing to the upside. When we looked at what kind of, what that environment generally looks like for EM currencies, if you have upside growth surprises, and at the same time, US break events are pushing higher, it's actually a really good environment for carry.
So we had carry currencies outperform, low yielders underperform, it worked out nicely. Now, when we look at the period ahead, I find it a little bit tricky to expect that the same environment persists. Simply the levels of economic activity surprise indices, the easiest are that the same run of upside is just unlikely.
And I think it fits very much with what Nora said as well. When we take, let's assume that the growth surprises come a little lower, but we think it's gonna work together with the lower US real yields, then that environment on its own tends to be very good for EM low yielders, mid yielders. If EM growth holds up a bit better, actually all of the space appreciates and then it's just a dollar weak theme.
So I think that's the kind of environment we should expect going forward. I think for me, lower US real yield is likely to be dominant. So we should be bullish on EM FX, where exactly we spread the bets a little bit depends on how badly EM growth turns if it remains resilient.
Great. So what about rates markets in EM then? Let me ask it in this way.
If you'd have got an upside surprise on payrolls, do you think we'd have had to give up with any sort of positive outlook on EM rates markets? Is there enough in the EM rates trade, given where front ends are already pricing, given some global fiscal risks in the back end, or do we sort of breathe a sigh of relief with a downside payrolls print with that? In EM rates in the front ends, while we indeed see a lot of EM central banks easing still from here, the market pricing in many places is already appropriate.
And we are struggling with the front end. We certainly have some countries where we think the receivers have further to run, but it looks like we do need a little bit of that fat push for these trades to extend. Now, if we take account of actual and we didn't have a weak payroll, I think what we would have been dealing with is extended market pricing, cyclical upturn, and no fat.
I think we would have had challenges in some markets. I wouldn't say it across the board. We certainly see some countries that still have scope to ease from very high rates, but I think it would have been challenging.
I've mentioned this on this call before, but I find it quite striking that at this moment, last call I said three payers globally. Now, it's actually four payers globally. We've added another payers in the global portfolio.
I think it's quite striking that we have that sort of setup at a time we expect to have to ease. Having said that, where the opportunities are in rates, in our view, is where we are looking at the compression of risk premium. So where FX can appreciate and where in the long that there is risk premium that can compress, and it's not necessarily linked to a further easing cycle.
So to turn it over back to you, Johnny, so how would you sum up the overall environment for EM fixed income, given all of this? And why are we not as optimistic about EM credit markets here? Yeah, so I think as you've both outlined, we've got an environment here where if we just take a step back, we have somewhat resilient global growth.
We have U.S. growth with downside risk, but probably not a recession. And that leads the Fed to multiple cuts ahead. And I think if you add to that, the longer term picture of underinvestment, I should say, in EM fixed income by global investors, so they, as we know, for the last decade or so have been piling into U.S. assets and we've highlighted they have been avoiding EM fixed income.
And then you have a little bit of, let's call it a sprinkling of institutional erosion questions in the U.S. And I think you've got a world which looks pretty supportive for EM local markets, both FX and rates, hence the positive views you've talked about in those bits of the market. And I think inflows are actually starting to recognize that we are tracking now 7 billion of inflows year to date for EM funds.
That might not sound brilliant, but we were at minus 12 year to date when we wrote our mid-year outlook in early June. So the picture looks like it is improving here and I think we'll continue to do so. It's difficult, though, to extend that to hard currency because spreads are just already very tight.
We are close to 17-year lows in sovereigns and corporates. We're a little bit off that in the last few weeks or so. But if you're thinking about a world where actually U.S. growth probably has downside risks, then for risk markets generally, and I think for EM credit as part of that, you have risk premia and spreads which look expensive.
If you look at our fair value models for EM sovereigns, they are 50 basis points expensive at the moment. So I think in terms of just where spreads can go here, we are less optimistic and it's unlikely that we're going to see much tighter spreads, more likely that they are going to be wider. And that brings us to the end of this J.P.
Morgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Noor and Aneshka, 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 J.P.
Morgan research reports related to this content for more information, including important disclosures. 2025 J.P. Morgan Chase & Company rights reserve. This episode was recorded on the 11th of September 2025.