From Damien Buchet, Chief Investment Officer, Principal Finisterre, part of Principal Asset Management
As 2024 is now behind us, we are reflecting on a year of political and geopolitical upheaval which culminated in the election of Donald Trump in the U.S., whose disruptive agenda hangs over emerging market (EM) investors’ heads. In this outlook, we flesh out our current view of the world, as seen from an EM lens, and highlight a few key investment themes. We also try to illustrate how a conviction-based emerging market debt (EMD) strategy blending “income” generation, “alpha” from idiosyncratic stories, and relative value ideas could significantly beat a more passive, “beta”-driven approach, as it just did in 2024. This will remain a market environment regularly shaken by global risk events and policy uncertainty, subject to rich valuations in places, and investors’ constant swings between “greed and fear”.
2024 in the mirror: EM naysayers proven wrong again
Amidst all the noise and headlines of 2024, which kept many global investors away from EMD, we find that emerging countries (ex-China) have remained remarkably resilient in growth terms (from 3.5% 2024 GDP growth ex-China, to a likely 3.2% in 2025), amidst continuing global disinflation and stable commodity prices, despite the policy uncertainties related to the most intense election cycle of the past 20 years. A number of challenging macro situations have spectacularly turned around, thanks to either forceful reform, an increasingly active and benevolent International Monetary Fund (IMF), or the defaulters of 2021-2022 who managed to restructure their debts. This is not to say that all countries got it right: from Mexico, to Brazil, Panama, Colombia, Romania, Hungary, Senegal—market vigilantes remain on alert regarding institutional, fiscal, or monetary credibility issues. EM corporate bonds continued to experience steady spread tightening while managing to largely alleviate the challenge of elevated U.S. yields, thanks to mostly clean debt structures and persistently low debt leverage: EM high yield (HY) corporates’ net leverage at 2.3x remains much lower than the 2.8-2.9x of U.S./EU investment grade (IG) credit issuers, let alone the 3.5-3.8x of developed market (DM) HY names. Meanwhile, EM currencies experienced a disorderly year, largely at the hands of a strong USD, while some of the highest real and absolute yields in the past 20 years in local EM bonds (ex-Asia) did not manage to attract much love from investors. Yet, we are convinced that the right EMD investment approach for 2025 could aim to achieve double-digit returns, on a combination of a still generous current yield stream complemented by some extra added value which will need to come from active management. This is for a highly diversifying EMD fixed income asset class, which sits right across the global IG/HY credit divide.
Also read: Unprecedented Market Transition Calls For Greater Diversification
2025 EMD outlook: All about “Trumponomics”, growth, and fiscal stability
What will shape the outcome for EMD in 2025 will be a blend of global macro issues—chiefly the impact of “Trumponomics” on the rest of the world in terms of trade, growth, and geopolitical risks, as well as EM home-grown considerations focusing on the growth/inflation trade-off and its impact on fiscal and monetary credibility. To blur the picture a bit further, populism will continue to rule in both DMs and EMs, often bringing erratic decision making, aggressive rhetoric, disinformation, and institutional challenges for democracies, as well as macro decisions which sometimes run against the economics textbook logic. Investors will need a solid “political economy” toolkit to make sense of all those moving parts.
