Oct 26 emd outlook fi insights

Key arguments

• The energy shock is smaller and lacks post-lockdown excess demand, so a broad return to persistent inflation is not the base case.
• Higher real rates and restored credibility give many EM central banks room to pause or slow cuts, with tightening only selective.
• High starting yields support carry and cushion moderate mark-to-market losses; local currency offers the best combination of carry and eventual duration upside.
• Tight hard currency spreads limit further compression, making US duration and idiosyncratic country selection the main return drivers.

Corresponding source evidence

1. 1 Insights Emerging markets: Inflation, central banks, and near-term debt outlook A smaller shock, stronger policy buffers, and a carry-led opportunity • A limited inflation shock: Notwithstanding broad price pressures, the energy shock has been smaller than in2021–2022. · 2022
2. Our base case remains atemporary increase inheadline inflation, with persistent pressure more likely where currencies, wages, or fiscal policy amplify the shock.
3. The most resilient markets should be those where inflation expectations remain stable, foreign exchange reserves are adequate, and fiscal policy isdisciplined.