00:00Let's just start here from some of the reaction that we're getting at least in EM credit markets to the Fed decision.
00:08Is your expectation that that this will hold or what's your outlook for really where the EM credit space goes from here?
00:16Thank you, Jennifer. Good morning, everyone. Generically, the yesterday's 25% very well telegraphed, I think very well expected by the market.
00:26I think for 2026, our direction of travel will really depend on data.
00:32As Chairman Powell said yesterday, it's going to really be about that sort of tension between softer labor market and whether or not the U.S. growth reignites in 2026, which means, you know, the Fed's decision around rate cuts becomes harder.
00:45And depending on the path that we take, that also sort of impacts how we see credit for 2026.
00:51But generically, my view is we will see a weaker dollar and a weaker dollar is generally good for EM credit.
00:57It reduces external debt burden. It's good for the domestic economy within a lot of these countries because the corporates there are able to have a much softer environment to operate in where the sort of debt capital structures are easier for them to service the debt.
01:13And when I think about 2026 as well, where, you know, the push-pull factors with the U.S. and the AI CapEx, that is also something that we don't see a headwind for emerging markets credit with as well.
01:26So structurally, we see a lot of investors are underweight their allocation to EM.
01:30And I think with the amount of supply that is expected in the U.S. space around the AI tech CapEx spend, I think that also gives the potential for investors to be looking elsewhere, which is also supportive for EM credit for next year.
01:44What do you see as the catalyst, then, for some of that rebalancing for EM credit as compared to developed markets in the U.S.?
01:56What do you need to see next?
01:59I think, generally, a Goldilocks environment is good where you're not seeing huge amounts of volatility in the U.S.
02:06So long as we're not projecting or expecting a recession or a huge slowdown in the U.S., I think that is supportive for EM credit.
02:14I think that's generically the sort of environment we've been in for the best part of the second half of 2025 after the whole Liberation Day excitement.
02:23So long as we're expecting a Goldilocks environment where growth in the U.S. is actually pretty decent, growth around the world is OK.
02:29Growth in the emerging markets, I expect it to be very solid for 2026.
02:33So that is good for the expected higher structural allocation to EM.
02:38A lot of EM central banks already have cut rates.
02:41Inflation is largely under control.
02:43So domestic growth should be supportive.
02:45A weaker dollar is supportive.
02:47Higher commodity prices are supportive for emerging markets.
02:50I think the general forecast is we're expecting strong copper, all the transition metals, iron ore, aluminium.
03:00So that is supportive for EM.
03:02So strong commodity, weaker dollar, sort of Goldilocks environment in the U.S.
03:07I think the only thing that, you know, we need to watch out for is that rates volatility where the Fed's job is harder, you know, with a dual mandate.
03:14Are they looking to cut rates or are they going to have to hike rates if we start to see a resurgence of growth in 2026?
03:22Remember, 2026 is midterm elections in the U.S.
03:25There's expectation of maybe some tax cuts or some fiscal boost coming through, you know, the uncertainty that we had from the tariffs in 2025 should be largely dissipated for 2026.
03:35So there are a lot of things in the pot that suggests that we should have a rather benign to strong-ish 2026 in the U.S.
03:45And that should be supportive for emerging markets credit.
03:47That's I will wait to see how that actually pans out.
03:52We were just looking at the MSCI emerging market index.
03:55Of course, it's down as we're seeing major equities globally down.
04:00When we take a look at some of the corporates and the growth sectors that you believe have more tailwinds heading into 2026, what's your focus there?
04:12Within emerging markets for 2026, I definitely like commodity sectors.
04:16I spoke about that.
04:17I like the metals.
04:18I like copper.
04:19I like iron ore for 2026.
04:21Yes, oil prices are expected to be lower.
04:23But that isn't necessarily a huge disaster.
04:26From a corporate's perspective, a lot of the corporates are actually low oil producing or low break-even producing oil producers.
04:36And so that isn't necessarily a disaster.
04:38I think a lot of the break-even levels for a lot of the EM credits that we look at is anywhere from $45 a barrel to $55 a barrel.
04:45So that's not a disaster.
04:47I really like the sort of some of the domestic sectors like TMT within emerging markets.
04:53I like that very much.
04:53We like the banks.
04:54The banks are very well capitalized.
04:55They've been in a very good spot as well.
04:58We like the enablers, the AI enablers within Asia.
05:03You know, you think about the Alibabas, the Tencent, the likes of those.
05:06So there's some pretty good sectors, I think, next year as well, because we potentially have the weaker dollar.
05:13You have EM central banks with more room to cut.
05:16There's growth baked into a lot of the EMs as well.
05:20The consumer sector should also be largely resilient next year.
05:23So we like Finns, we like consumer, we like some of the digital sectors, and we like commodities-related sectors.
Be the first to comment