The US economy remained robust, leading the market to further dial back interest rate cut expectations. Frontier sovereign bonds outperformed (1.78%) [1], followed by hard currency sovereign bonds (1.47%) [2] and EM corporate bonds (0.70%) [3]. Meanwhile, EM local currency bonds (-0.34%) [4] lagged, as the US dollar strengthened 2% over the month.

The US presidential election on 5 November was among the most pivotal events of the year. Republican candidate Donald Trump secured a landslide victory, becoming the first president in the last century to serve a second non-consecutive term. Naturally, this has sparked some concerns for the EM universe. Firstly, Trump’s pro-growth policies could be inflationary and thus result in fewer Federal Reserve interest rate cuts. In turn, this could mean higher US yields and therefore less attractive EM valuations. The possibility of a trade war with China also looms large, alongside the threat of tariffs on what the US imports, which could severely affect economies that trade a lot with the US.

In terms of performance specifics, the JP Morgan EMBI Global Diversified Index rose 1.47% as the positive returns from US Treasuries (1.48%) outweighed the essentially flat spread return (-0.02%). Most of the spread tightening came from high yield (HY), which outperformed (2.01%), while investment grade (IG) underperformed (0.90%). The top-performing countries were Lebanon, Argentina, Ukraine, El Salvador and Sri Lanka. Lebanon outperformed given the de-escalation following the Israel-Hezbollah ceasefire. Argentina dazzled with positive news, including government debt projected to fall from 155% of GDP to 91% by the end of 2024. Meanwhile, the worst performers were Venezuela, Bolivia, Suriname, Romania and Gabon.

Turning to local currency sovereign bonds, the JP Morgan GBI-EM Global Diversified Index (unhedged in US dollar terms) declined by -0.34% in November, marking a strong comeback from October’s poor showing. The yield on the index fell by 11 basis points (bps) to 6.30%, generating a negative bond return (-0.34%), offset by a positive currency return (+1.14%). The top performers were Turkey, Peru and Colombia, and the worst were Romania, Uruguay and Brazil. Turkey continued along a positive trajectory, with tight monetary policy driving disinflation. A narrowing current account deficit and further de-dollarisation supported the lira.

Lastly, the JP Morgan CEMBI Broad Diversified (EM Corporate Index) rose 0.70%, despite spreads widening by 10bps to 250bps. This was outweighed by the positive returns from the US Treasuries (1.04%). Unlike sovereign bonds, IG corporates outperformed (0.77%) while HY corporates lagged (0.59%). Regionally, Europe was the top performers; the Middle East underperformed.

Selected country developments

November saw a series of surprising election results across EM. In Romania, Calin Georgescu topped the presidential election's first round, signalling a potential shift towards national sovereignty and less reliance on the European Union and NATO. The general election resulted in a fragmented parliament, with the Social Democrat Party leading, reflecting widespread voter dissatisfaction with the political status quo. Uruguay's Yamandu Orsi, of the Broad Front leftist coalition, beat the centrist ruling party and won Uruguay's presidency, with 49.8% of the vote. Orsi has pledged not to raise taxes and to enhance the social safety net.

Senegal’s ruling party, PASTEF, won a majority in the snap legislative elections, giving President Faye a stronger mandate for his reform agenda. Sri Lanka’s President AK Dissanayake also called for a snap election and secured a greater than two-thirds majority in the parliamentary vote, with his coalition winning 71% of seats. This strong mandate likely comes with public expectations of change. It remains to be seen if he can deliver.

The International Monetary Fund (IMF) continues to play a pivotal role in supporting many emerging economies. Zambia and the IMF reached a staff-level agreement following the fourth review under their 38-month Extended Credit Facility, which would unlock US$185.5 million(m), pending board approval. Further afield, Sri Lanka and Suriname both secured staff-level agreements for their respective Extended Fund Facility reviews. Sri Lanka is poised to access about $333m and Suriname around $61.3m upon board approval. These agreements underscored the IMF's acknowledgment of solid programme performance and the importance of fiscal discipline.

Outlook

November proved to be a slightly stronger month for EM debt, despite the US dollar strengthening against EM currencies. We continue to see value in the HY and frontier space, where spreads and yields still look attractive. This is supported by increasing market access, continued multilateral support, and progress on debt restructurings. In EM local markets, we remain overweight Latin America due to the region’s attractive real rates. At the same time, less elevated economic growth and contained domestic wage pressures, should create space for central banks to cut interest rates. We have also been adding duration in Asia in anticipation of rate cuts. 

For EM corporates, credit fundamentals remain supportive and net supply is expected to remain negative as companies continue to pay down bonded debt. Slowing global economic growth would be less favourable in terms of operational performance, but this would still be manageable given the low leverage level and healthy interest coverage.

The biggest risk for EM debt is that the pathway for US policy interest rate cuts could become more constrained if Trump-related concerns – such as fiscal loosening, higher tariffs, and labour market disruptions from deportations – prove to be inflationary. Geopolitics also remain a concern, including the ongoing conflicts in the Middle East and Ukraine.