Emerging Market Debt (EMD) continues to stand out in Q4 2025 as a compelling opportunity for investors seeking resilient growth, attractive carry, and diversification. Despite elevated macro uncertainty, the EMD sector is supported by improving fundamentals, robust technicals, and a favourable global backdrop.

Elevated Yields and Spread Potential

Hard currency sovereigns offer compelling carry potential, and while spreads are near the tighter end of their range, there remains room for modest compression. Even in a rangebound environment, the income component alone could support mid-teen annualised returns in select areas. In scenarios where global growth remains stable and the Fed continues its rate-cutting cycle, EM assets are well-positioned to benefit.

Supportive Macro and Fundamentals

Many EM economies have transitioned from post-pandemic stimulus to fiscal consolidation, helping to stabilise debt metrics and rebuild external buffers. Real policy rates are positive, inflation expectations are anchored, and central banks are now in a position to ease. External positions have strengthened, with normalised current accounts and increased local-currency funding reducing vulnerability to USD volatility.

Growth Differential Play

EMs are benefiting from improving growth differentials versus developed markets, even as EM growth moderates. Historically, relative growth strength, rather than absolute levels, has driven EM outperformance. The quality of growth is also improving, with a shift toward investment and exports over credit-fuelled consumption. Institutional strength is becoming more visible, with more orthodox policy mixes supporting domestic stability.

FX Tailwinds and Local Market Opportunity

Lower U.S. Treasury yields and a weakening dollar have provided a significant tailwind for EM local markets. While valuations in some low-yielding EMs are stretched, we see better opportunities in higher-yielding markets such as Mexico, Brazil, South Africa, and Colombia. These offer scope for rate cuts and favourable curve dynamics, particularly in the long end. EM FX positioning remains focused on high-carry currencies, with relative-value opportunities across regions.

While we see some risks in the form of political volatility, fiscal slippage, and uneven global growth, the broader EM debt landscape remains constructive. The combination of solid carry, improving growth differentials, and a more predictable policy environment across many EMs provides a constructive setup for continued outperformance opportunities.