EM Fixed Income: EM resilience amid renewed USD strength and idiosyncratic pitfalls

(soft music) - Hello and welcome to our at any rate emerging markets focus podcast. A place for us to discuss recent developments and key issues of focus in the emerging markets fixed income asset class. I'm Ben Ramsey, head of EM Sovereign Credit Strategy here at JP Morgan. And I'm joined by Anesca Cristobola, head of EM and LAT-Tem local market strategy. And today we're joined by Nesca and Pujari, our senior EM Sovereign Credit Strategist, both at JP Morgan. Anesca, Nesca, thanks for joining. - Hi Ben, nice to be here. - Hi Ben, thanks for having me here. - So let's get into it. It seems for markets we are, of course, still looking here at what's going on with Iran and the streets of our moves. We have new headlines every day, but it seems like the markets kind of reacting less and less in both directions to these headlines. Kind of feels like we're pivoting from fearing the tail risks from the Iran conflict and the streets were removed to kind of assessing the damage, which has already been done by it. In terms of inflation, both the current transfers were rolling in and how much more price pressure there could be to be endured going forward. And this assessment is not only from fuel prices, but I think we're increasingly focused on the impact of food prices. Of course, a lot of fertilizers go through the streets of our moves. We've also been here at JP Morgan looking a little bit more at risk from El Nino. In terms of oil, Brent crude seems to kind of have transitioned from a $110 range in recent weeks to really something that's now bouncing around between 90 and 100. As both the US and Iran seem to be closer to a deal. Of course, we get kind of headlines pointing to risks around that every day, but it kind of feels like the direction of travel among the volatility is that we're getting towards the end of the conflict, even, of course, this remains fragile. The influx to be, as we discussed last week, has led to a repricing of global rates, even as the AI theme strong earnings and actual activity that I have pushed risky assets even higher. And credit spreads continue to be moving towards historical tights. So in short, the broad market narrative seems to have moved from recessionary, sort of a recessionary, stagnation-type risk theme to one, which is underpinned by improving growth, a better outlook for the consumer. Of course, risk ahead there with inflation still bubbling up. So that's not where we're starting. We're here going to obviously try to take that frame and look at it from the EM perspective. And then we're going to get into some particularly topical ideas in credit story, which is Senegal with Nishan. OK, let's start with you, Ben. How is this backdrop that you described of stronger goals? Growth was stronger inflation, mixing with the outlook for potential higher rates in terms of sovereign credits? Yeah, I mean, it's really one where I think that that stronger growth weighs a lot more than necessarily the inflationary outlook on the credit side and that may be in a bit contrast with your world, Nesca. As long as we continue to sort of be trading as if recessionary risks are getting pushed farther into the future, or getting more diminished, it feels to me like that is just going to continue to underpin this very strong tone for risk assets. And I think credit spreads fit right into that narrative and sovereign credit spreads fit into that narrative as well. Of course, when we think about EM fundamentals, there's winners and losers from a world where there's higher oil prices. But we've always sort of seen the EM world is a bit more skewed to a net come out of the exporter. So I set up and I think overall on the sovereign credit side, countries which have proven to now be quite resilient to shocks that have been seen throughout the course of this last decade plus, it feels to me like we're going to continue to be grinding tighter. Of course, as we discussed last week, as basically treasuries push higher as the Fed gets reprised, we do start to push all in yield back to higher levels. And that basically means country sovereigns coming back to market to refinance are going to be facing a bit higher coupons that they're going to have to be dealing with. But I think we, as we've been discussing, we're still pretty far from levels that are consistent where we have any broad refinancing risks. Of course, that doesn't keep any individual country story from running the trouble and one which the market's been watching for quite some time and we'll get into in a bit with these shown as an example, like a Senegal. But if you're to take a sit back and just sort of look at EM sovereigns as we're now approaching the mid-year point in terms of returns and the breakdowns of those returns, it really feels like you could say that nothing's even-- if you were just to look at those returns, you would say, well, not much has happened this year. I mean, we're basically running at the NB Global Diversified with a 2% year-to-date return, a little bit of a drag in terms of the higher treasuries, which has been compensated by effectively spreads the carry. If you look at it by high grade versus high yield, we can see the high yield is taking the lead. So nothing, basically, we're still kind of crunching and compressing with spreads and high grade as just a small return this year because the drag there from the treasuries is larger. If we look across regions, it's Latin America and Africa, which are leading spread returns and overall returns. But Latin America 3.7, that's pretty decent, Africa 2.6. Basically, again, kinds of bells as a story where it all must be pretty OK with the world because regions and countries, which are the more high yielding one, the more susceptible to shocks, are showing pretty good, solid returns. So at the end of the day, a lot has happened. Credit spreads are at the tights they've been in 20 years. It's hard to say that there's a home run to hit in terms of things still moving stronger. We know the risks are on the table. We've been talking about the consistently week after week. But it's hard to see this catalyst that is going to be pushing spreads, meaningfully wider, if the narrative is shifting away from, again, sort of stagflation, which in our term, in our world, is more concerned about that risk from the recession side, the stag side. And that's sort of getting pushed to the side and reflating growth. Enflation is more of the narrative. So let me turn to you with that. And that's got our G10 FX strategists have become more bullish on the dollar in this current environment, which we've been describing. And there's some talk of a revival of US exceptionalism. How do you shape your own views in the context of these themes? And how specifically would you characterize the EMFX outlook in this context? Thank you, Ben, for this question, because actually, it's been popping up recently in a lot more client discussions, exactly along the lines that you've asked yourself. So just for the context, our G10 FX strategists have turned a bit more constructive on the dollar, a bit more concerned on the euro revising their euro dollar forecast, meaningfully lower for the second half, the 26. So before, I think they were looking at 120 ranges. And now it's 113, 115 in the second half of 2026. Now within that context, I would also mention that in their own portfolio, they are still still remaining constructive on some of the higher-carry G10 candidates. So the dollar exceptionalism seems to be popping back as a theme primary against more lower yielding, growth challenge economies. Now, from my own perspective, I can see recently evidence of renewed US equity exceptionalism. So I monitor on a weekly basis how many equity markets are outperforming or underperforming the US equity market. And what's been very interesting is that for the past six weeks, those statistics have very much turned. So until about six weeks go, until mid-April, I was monitoring 60 to 70, 80% of EM equity markets outperforming the US equity market. And about six weeks ago, then I've turned in the last two weeks of data, it has been only two equity markets in EM outperforming the US. So that's out of the liquid space. That's about 10% of the markets we cover. And what is also interesting-- so let's say in equity, you will say, OK, US exceptionalism is coming back. But at the same time, during that same period, where I have just given you these very low percentages of EM equity markets outperforming the US equity market, actually EM FX has returned positively in most countries. So majority of the EM FX prices actually up over that same period in total return terms. So how is it that we are getting back some waivers of US exceptionalism, but actually it's not that impactful in EM FX. And here I would very much say that the equity market right now might not be the best measure of the cyclical backdrop that EM is facing, mainly because the equity markets are less geared towards capturing some of the most positive themes, let's say AI. To give you an example, in a lot of EM countries we have growth drivers such as Fiscal or Defense, but they might not have an equity market to explain that. For instance, in the Czech Republic, I believe the equity market only has seven stocks in it, and even if you try to express car-sector outperforming, you couldn't find a stock to do it with. So if I only focus on growth rather than narrowly on the equities, I am actually less willing to think that there is your exceptionalism. We have very good performance of the EM forecast revision index that captures how our economists are revising growth for EM. In fact, over the past one or two months, maybe 70, 80% of our countries have growth forecast revisions that are better than the US. So if you focus more broadly on GDP growth rather than equity, I am actually less persuaded as your exceptionalism. So in that context, I think on EM side, the EM FX outlook, I would say is still relatively optimistic, although with all those concerns we have on the Middle East, we still prefer a higher carry bucket for the action of carry rather than the more exposed fuel yielding oil importers. Okay, so that's interesting. So if we're not thinking here that there's necessarily a global dominant team like US Successionalism, which would be sort of in a broad way impacting EM and the EM FX, what are the idiosyncratic stories that you're focused on in your space where you think we can find ways to perform? Yes, so actually many idiosyncratic stories, but not all of them give a straightforward way to express the trading views. So let me just focus on those where the kind of transmission from the idiosyncratic factors is stronger to a higher conviction expression. The first one I would mention is Hungary. We continue to monitor the progress in the headlines towards unlocking you funds, the emerging theme of the country attempting to adopt the euro over some time frame or meet the Marshall criteria by 2030. We monitor that story very closely and from what I can see, all the headlines are pretty much on track. Anything that I've noticed a little bit more on the kind of discussion side with the EU's topics that have emerged is the pensions or special taxes. So far what I can see it's more in the category of noise rather than signal. The main story of getting back you funds and attempting euro entry I think is on track and therefore we remain quite constructive across the different local assets. So that one story we are monitoring very closely. The second one that's idiosyncratic and I think again offers trading expressions is Israel which has a lot of idiosyncratic drivers that distinguish it from the broader space. On the interest rate side we consider Bank of Israel as having a scope for a decentralized policy cycle. First the because currency appreciation is putting downward pressure on inflation. We're also interested in going in general find that Israel inflation factors can be quite dear to Instagram. With let's say local pricing of gas prices less correlated to global prices. On the effect side it's also a very interesting story because most of the EM tech or AI expression in Asia, Israel is one where we think there is a way to express this tech theme in the EM region. Finally we have a lot of political developments in the local market space. Elections coming up in Colombia. The one I would mention on this call is Turkivr obviously they were developments in recent weeks with the opposition party but from market perspective we have seen a very high proactive management of the risks that impact on the currency. So I think that's the very important factor to keep in mind that while there's a lot happening actually authorities continuing to show rather large commitment to their economic framework at this time. Great thanks Anasca. So Nisha let me turn to you because we're going to discuss an idiosyncratic story in the sovereign credit space where we have no shortage of those but when they kind of bump up against repayment risks that's when we look at them particularly closely. The one that's been garnering significant attention since last year is Senegal and now the political situation seems to have escalated to a critical point here and again markets are kind of reacting to this. You sort of set the stage for us here. Let us update us in terms of what's going on over the last weekend in terms of the politics and what's happened in terms of the price action. Sure thanks Ben. So the one question that has been discussed continuously over the past few years and has been asked continuously to us over the past year is if Senegal is going to restructure his debt. This is following the hidden net scandal which led to massive increase in debt to GDP to about 130 percent which was earlier in the range of 70-75 percent. Now more than a year later the question still persists. They have not defaulted. They have not restructured their debt but the question still persists only that the chatter has now become more stronger around when Senegal is going to restructure his debt instead of if. Now adding to all of this there is a political lift at the top which has made this scenario more worse. What happened over the past weekend is that the president phi he dissolved the cabinet removing Prime Minister Songko and replaced him with a technocrat and former central banker Alaminu. Just for some color Songko is widely seen as central to fast steps strong presidential and parliamentary victors in 2024 which he was barred to run from and allowed phi his ally to run instead. Now while Songko was eventually made Prime Minister following the parliamentary victory and has been a decent relationship between phi and Songko over the past year or the late last year he saw divisions increase between phi and Songko. This is reportedly over the policy and internal influence including having different views on debt restructuring or debt metrics and engaging with the IMF. As an update this week what happened over the falling the dismissal by the president last weekend. Parliament reinstated Songko as a member of parliament and now he's elected as the speaker of national assembly. This just adds more noise and more uncertainty around the Senegal credit story which is already quite complicated in terms of hidden debt how it's going to get restructured if it is going to get restructured how they're going to get AMF program. So there's quite a lot of uncertainty and this political noise just makes it more worse. So how's the market reaction to that? In Shantan you know we do earlier had a base case that we've had an IMF program without a preemptive restructuring. Has that changed? Do we take a credit event is more likely over the near term and if so what what broadly can we say about what the market may be expecting in terms of recovery levels? Well a base case has definitely changed in the sense a base case doesn't definitely look like we are going to get an IMF program without restructuring. We are now increasingly squint towards the other two scenarios that we highlighted that is number one we might get our IMF program with restructuring or number two they can continue to model through without an IMF program. On the IMF program with restructuring that timeline is a bit more protracted now. There are a couple of reasons number one being the war related uncertainty on the economy the impact that it has on the economy which will need to be reassessed and budget will have to be reworked before we're going to the IMF and the political situation now makes it much more worse because you will have to pass some key reforms and bills and with the political noise I don't know how it's going to happen. On the number two that is the model through regional markets are the key. They have been able to finance themselves regionally or the past year or so even though they didn't have external market access, the IMF programs no more no not much bilateral financing but they have been able to finance themselves just because of the regional market financing depth and they will be able to raise finance. Now this has been the case this year as well just that last month we got a bit lower financing than it was planned in the budget but we will certainly be eyeing the this space as they are able to model through because of this. Now, if you come to the questions of recovery first within the team as well, we are continuously debating and still debating the fact that has the question changed from when to if. But if you look at market pricing right now with market bond prices around 50s to lower than 50s now, it already indicates that markets are now thinking about the question of when instead of if when it comes to recovery levels, it will be based on the decision making exercise as it's the case for all our restructuring stories. But this is very complicated in case of Senegal. There are a number of reasons. Number one is that you are currently quite unsure in terms of what the in scope debt parameter will look like to restructure. You don't know whether it's going to be on a residency basis or a currency basis whether regional domestic markets are going to get included or they're going to get excluded and how's the macro situation has changed for us to understand the relief and finally what the debt sustainability targets will look like because it's both a solvency and liquidity targets are looking bad. Given this all these things, we purposefully avoided doing a DSA based recovery analysis as well. But regardless, you can look at the market prices and looking at this market prices, we think markets are already pricing some form of coupon relief. We estimate around 75% of the government coupon rate, matured the extension of five years and normally headcard of around 15%. Now if and when eventually Senegal decides to do it restructuring, it's going to be completely different as we have seen historically in a different case. It's not going to look as simple as I've said right now. So this are not the implied recovery at all but this is what market is implying right now. So when the Senegal indeed decides to restructure or if it is going to happen, then what will happen is the prices will first fall to below 40s or to high 30s or so and then start moving towards recoveries as historical as in the case and that is how you right now. Great. Thanks, Tasha. Well, certainly last to continue to watch there. Well, that brings us to the end of this JP Morgan at any rate emerging markets focus podcast. Thanks to you Anesca and Nishan for joining today and thank you all for listening. We hope to have you back again with us for the next one. This communication is provided for information purposes only. Please refer to JP Morgan Research Reports related to his content for more information including important disclosures. 2026 JP Morgan Chase & Company all rights reserved. This episode was recorded on on the 28th of May, 2026.