Investors’ appetite for local markets remains solid. In our view, this is supported by two main factors. The first one being that emerging markets continue to offer compelling macroeconomic fundamentals, and the second one being a rising interest in diversification from structurally long USD exposures. Below, we outline four key reasons why our Emerging Market Debt (EMD) team believes EM local debt should continue to offer value in the quarters ahead:

First: strong monetary policy discipline and good management of inflation:First: strong monetary policy discipline and good management of inflation:

Emerging Market (EM) central banks have done an exceptional job in managing monetary policy over the last year, as despite widespread easing during 2025, EM real rates have remained broadly stable and at attractive levels. This means they avoided the common policy mistake of excessive easing. The three charts below illustrate this dynamic, showing the simple averages of EM policy rates, EM CPI, and EM real rates (policy rate deflated by 12-month CPI) for 18 EM countries. As the charts below show, real rates currently stand at approximately 2.5%, and have not moved much. Looking ahead, we would expect inflation to remain well contained through 2026, supported by stronger EM FX, subdued oil prices, and moderate GDP deceleration, all of which favour a supportive outlook for EM local bonds.

Second: EM offers a tight fiscal anchor, with a steady improvement relative to DM:Second: EM offers a tight fiscal anchor, with a steady improvement relative to DM:

Third: 19% returns in 2025 are causing “ownership FOMO”, and positions are still light despite last year’s rally:Third: 19% returns in 2025 are causing “ownership FOMO”, and positions are still light despite last year’s rally:

Fourth: the ongoing narrative of USD weakness should favor EM Local Markets:Fourth: the ongoing narrative of USD weakness should favor EM Local Markets:

With all that said…what are some key risks to the bullish view?With all that said…what are some key risks to the bullish view?

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