Emerging Markets Outlook and Strategy for 2H26

(upbeat music) - Hello and welcome to our at any rate Emergey Markets Focus forecast. A place for us to discuss recent developments and key issues of focus in the Emergey Markets vaccine-comaset class. I'm Rizoganes Head of Global Markro Research here at J.B. Morgan and I'm joined by my colleagues, Nora Santivanyi, who's the Senior Global Economist, and I speak with Shhtoboba. He's the head of EMEA EM and local markets, Latin local market strategy, and then Ramsey Head of EM, Sovereign Credit Strategy. Nora and Ashka Ben, thank you so much for joining me in this conversation. We published a week ago already our media outlook Emergey Markets outlook on strategy discussing the outlook for the second half of this year, and we took stock of what had happened in the first half. Generally speaking, when we look at year-to-day returns across the various components of EM-fixingcom, every time we're seeing what happened three percent, certainly EM from tier markets at top of the chart 6.3 percent, although not as juicy as what we saw in the equity side, EM equity is actually being among the best performing asset classes at 22.2 percent. In any case, a lot happened, a lot of back-and-forths, a lot of that related obviously to the middle of this conflict. So it is probably good to start the conversation with you to take stock as to what is happening on the economic side. Generally speaking, we've been highlighting the very strong global and EM growth dynamics as we enter the energy shop period triggered by this middle-disk conflict, which together with added fiscal support has generally speaking underpinned our forecast for trend-like expansion in the second half of the year. So can you describe for us, what are the pillars of this growth momentum? And is it mostly due to the AI-related capy cycle that we'll talk about here? Or there's something more fundamental in terms of the drivers, business spending, consumer resilience, et cetera. And of course, we are this week discussing the reopening of the Strait of Hormuz. We're expecting by the end of this week the signing of a USE Rand deal. And the question is whether you see any additional growth impetus emerging from this signature? Hi, Luis. It's good to be on the podcast. Well, if we look at the incoming data globally, it's telling us that both global and EM growth entered this energy shock with quite strong above trend momentum. As you mentioned, we think that global growth averaged somewhere around 2.5% in the first half of the year. EM is tracking 4% and EM outside of China, around 3.5%. The strength has been quite broad-based, actually, and arguably broader than expected. It's really underpinned by multiple pillars. First, we have the tech boom in Asia. But we are seeing this lift accompanied by a cyclical lift in non-tech cap-ex demand. And we think that partly reflects the fading of last year's business question. We think the global industry upturn has actually has further room to run and maintain a quite rapid 3% to 4% rate of expansion that we've seen so far this year. A really good news, I think, is that the lift appears to be broadening to labor markets globally. And we see both EM and US employment growth picking up. And all of this is reinforced by a still favorable backdrop for financial conditions and continued incremental shift towards easier fiscal spaces. The US consumer has actually done a really good job so far of smoothing through this energy shock. So all in all, there's a number of pillars there that make us think that the growth resilience we're seeing in the first half could actually continue here. Now, in our forecast, we do have global growth moderating over the second half, but it's shifting close to potential from above potential. So it still is quite solid outlook for the second half. And actually, the latest developments are reducing the downside risk. And could even add some upside risk to the outlook arguably. I think if oil prices settle at lower levels, maybe closer to 80, let's see, that could lower a second half. Consumer price inflation compared to a scenario of higher for long oil prices. Now, against this quite a bit outlook that I'm painting here, there are some, of course, some still some risks and some regional divergences as well that I'd want to highlight. So much of the strength at the moment is coming from US and with Asia. And there, of course, this tech-led CapEx cycle that I mentioned is quite important that could actually create some increased space for fiscal supports. China is expected to slow down in the second half after a pretty strong first half, but probably not dramatically. Experts are still getting some lift from the global IP cycle. Domestic consumption is weak, but we could see fiscal policies stepping up if that drag starts to become more of an issue. Land time has been supported by higher commodity prices. So there we could see some swings coming from terms of trade both up and down. And Mexico has been lagging behind the rest of the region. There's some constraints from fiscal and then tighter financial conditions potentially weighing on the outlook. Now, Europe has been, I think, the weak spot, but mainly Western Europe, we've seen negative impact on real incomes and confidence. So that region has seen the greatest damage from the conflict. But C-E region is getting some idiosyncratic support from EU transfers. So a number of moving parts here and differences across regions, but overall a pretty upbeat story, I would say, the least for global growth and EM growth. Let me stay with you. There's no free-lunch in economics. And these growth resilience together with this oil price shock has led to an up-dick manipulation data. So far, confirmation of these up-dick leading central banks generally speaking across EM to tilt more focus. There is, however, an important distinction between financial stability pressures that are related to this energy shock. And maybe more, let's say, macroeconomic pressures where it's strong growth and firm and core inflation. How do you see this divide across emerging markets? And do you think that a reopen of the sort of foremost good-prombed EM central banks actually to height less if the damage inflation already done allows them to? Or do you think that, regardless, there's likely to be further tightening from here? Yeah, Luis, I think the bias is still going to be for further tightening. There is, of course, some relief that we're going to get from, maybe lower oil prices. And if oil settles closer to 80, then headline inflation has probably peaked in May or June. And momentum should trend lower over the second half of the year. That's headline for core inflation. I think we are going to see some continued as through into core prices in the second half of the year, almost regardless of where oil prices head in the next few months. I think there's going to be some delayed goods price pressures coming from the rising supply bottlenecks, the transportation costs having gone up, tech prices, surging, that is reflecting also broader demand strength. So that's going to be putting upward pressure on underlying inflation. And services inflation remains quite sticky across the board. So I think we end up in a situation where headline inflation momentum comes off, but actually core inflation in EM is probably going to average somewhere around half a percentage point above central bank targets and versus pre-comptic levels. Now for central banks, the growth impact is less severe than feared as we've been highlighting. And I think the price pressures are firming and underlying terms. So that is pointing us towards tightening, bit more tightening in policy than previously anticipated, while recognizing that policy in EM remains quite divergent. So we do have six central banks hiking, five cutting, the rest on hold. But I think across these divergences, really the bias has been tilting in a more hawkish direction. Now we have a group of EM central banks that have tightened so far from a defensive position or position of weakness as we've been calling it. And that's in response to credibility concerns of ex-pressures. You know, this is Turkey, Philippines, Indonesia, Pakistan, South Africa, a little bit. And I think as the tail risk from the energy shock received, maybe some of these central banks will be under less pressure to tighten further. So some of the pressure could come off of them. At the same time, there's a growing group of lower to mid-yielder central banks that are now embarking on a more gradual tightening path. And that is motivated more by domestic macro conditions that increasingly point to a need for tightening, to restrain inflation and stronger demand. So examples of this would be Korea, maybe the Czech Republic, some of the Indians. And then finally, there are some idiosyncratic cases within EM where central banks are cutting rates, including Hungary, Israel, and some of the high yielders like Brazil or Russia. Of course, the Fed remains a big question mark in all this. As I mentioned, financial conditions have been broadly supportive. Even with these expectations of high ex, overall, we have global policy rates rising only, like 10 basis point on average over the course of the year. And a big part of that is the Fed staying patient. And remaining on hold. But I think if that anchor dissipates, and all of a sudden we're faced with a tightening and financial conditions that could result. a little bit more pressure on some of the EMS. We know that US growth is resilient. We think that the labor market there will tighten and the Fed is going to be increasingly, I think, pushed towards rate hikes. - Thanks a lot, Nora. And let's do watch there for the second half of the year. Let's speak to strategy in EHSCA, a certain local markets with you. So one of the key messages from our media emails published a week ago that our clients can see in JP Morgan markets was the, this resilient cyclical background that Nora just described. Together with low fundamental vulnerabilities, some of the active stance of several EMS central bands that will allow for continued carry performance as a higher inflation and a likely hawkish shift by the Fed. Let's see what happens this week. Good challenge at the asset class. So can you elaborate how this cross-current supply to EM local rates across regions? Do you see a near-term boost for EM rates coming up from the lower prices that we're seeing on the back of this headlands of a US-erend deal that could prompt a shift, let's say, from inflation back to Goldilocks for EM rates? - Yes, certainly. As you said, for EM local rates, there are a lot of cross-currents that play. Let me just lay out these cross-currents or the major drivers that we are looking at. On one side, we have an environment of generally core inflation being sticky as a starting point and always the additional inflation imposes. We have resilient growth with upside terrorists as Nora described and generally wide fiscal positions. And then on top of it, we are awaiting how hawkish the Fed might be that something that we still have to learn, but certainly the reprising of the Fed tells us that we are not going to get easing and the direction is likely into more tightening. Against that, on the other side, we do not have a fresh pressure generally in EM that normally drives a lot of the market pricing. And the market pricing itself already extended very much through the Middle East conflict. So the starting point of what we see as what is priced in is already quite large. Now, when we weigh these cross-currents, we have kind of been more neutral on the asset class on the local rates in general and obviously picking winners and losers and then trying to emphasize more ideals in critic plays. Now with the latest news on a deal and all prices material, it certainly introduces a certain bullish element in today's. But let me try and put a little bit of differentiation here and group the different countries into how that lower all price might affect them. I would say that the differentiation is actually not regional. I would say in every region in the kind of groups that I'm going to describe, we have some kind of that belong to one or the other groups. I wouldn't say it's necessary for region. It's more about how the fundamentals of the country play into this backdrop. So the first group of countries, I would generally call generally low yielders, but countries where growth has been good, inflation is going higher and we are noticing a more very standard central bank responses because if you have that mix, even if you don't have effect selling off, you might start being more hawkish. So we have that turn hawkish in a lot of central banks. I would say that that is not necessarily all energy price reliant. In fact, it seems a direction of monetary policy that is very standard driven and I would say we might see that continue as the deal might encourage higher growth. In that group of countries, in fact that group of countries I would say has grown, not decreased. We've generally been considering in these cases how fast they might turn hawkish and place our trade ideas more about the pace at which they might respond to these underlying drivers. Then we have a second group of countries where the monetary policy responses have been more into defensive area. So I said in general EMFX or markets have not seen a lot of pressure in EM, but that does not apply to everyone. We have a narrow group of countries where balance of payments has been more vulnerable, where FX has been under pressure because of all prices and the central banks have not been responding to underlying, let's say, stronger growth, but rather to these market pressures and have been more defensively hawkish. Now that's a group of countries where we might see a little bit more sharper reprising based on what's happening right now. The final group of countries is high yielders where the starting level of rates is already high, their monetary policy cycles are desynchronized and they have high yields to start with. That's a group of countries that might more quickly fall into the Goldilocks narrative from Reformation narrative because that's where FX and generally market risk sentiment matters a lot more. - I'm glad there to watch by EM rates investors in terms of discriminating across so many countries stories. An edge count that currencies side in our media, Emos, which are more constructed EM currencies, a bit of the same dynamics, higher yielders and currencies where central banks are already too high to where the favor can you describe where we are more positive, where we are more positive and where we are more cautious actually on the currency space. - Right, so I know I can rate where I would say it's very much been a backdrop of cross-carbons. I think for FX, EM FX in general, it's been more aligned in one direction and that has led us to simply pick this asset class as the one that we are more constructive on because it has been easier for the drivers to align in a more constructive direction. So generally growth has been strong. I would very much emphasize that so far in the EM growth tracking, we had not noticed a lot of signs of US exceptionalism. That is very important because that's the one risk if that were to come back. We would have a different backdrop, but so far we are not seeing that across the board as the data does not confirm that. So that's very important. If we have central banks in the EM that are more proactive in shifting hawkish based on the underlying growth in question mix and not defensively, I think that's also generally bullish for EM FX. I would say a lot of the mid to high-holders fall in that category, especially since I've mentioned that we have not had a lot of balance of famous pressures across the board. So I would say when we look at these more constructive stories that generally in Lossam and EMEIEM simply because that's where we have the mid to high-holders without BOP pressures. On the other hand, in EM Asia, that's where the concentration of countries with some energy issues and general oil is higher. Now into that, it's very important to highlight the fed risk that's generally something for EM. That's very important. We have taken the view that for now, the fed risk does not prevent us from a constructive view on EM FX. And let me highlight two main points for it. So the first one is we find that fed reprisings that drive real yields materially higher are the more painful one. At this moment, that's a judgment that's very difficult to make because the mix between break even rates and real yields of what drives US yields is at this moment, I think, really hard to make from this starting point. Second, the starting point of EM fundamentals is actually on average, again, the exceptions for that, but on average, very good. And we find quality adjusted yield as quite high. So when we adjust yield in EM FX for core inflation or the balance of payment starting position for most countries, the starting point is quite resilient. - Interesting. Well, let's see whether the headline of the Strait of Ormuzri opening helps bring a softer and the multilateral dollar stance and that helps you in currencies. Thanks, Aneshka. Let's switch to wrap up then the views on EM credit. We still know that sovereign spreads are historical tights. However, resilient EM growth probably can keep them there. Generally speaking, how do you assess that we'll be doing this for EM credit at this stage? Is this resilient growth enough to anchor EM credit spreads despite the EM monetary policy tightening that Nora mentioned and these geopolitical risks that we keep bringing up. - Yes, Luis, you're right. I mean, we've been just talking about tight spreads over and over again for the last several years, but we continue to grind tighter. If we look at the MBX triple C just to have a sort of neutral comparison without some distortions that we've seen over time and we look back in history, we're at just a 17 basis points from an all-time tight that we reached back in 2007. So nearly 20 year tights here for the MBX triple C, the MB overall in our traditional Super Bowl and bond methodology is through 230 basis points. So we were in that measure 240 before Iran. So the Iran conflict. So we're all in a lot tighter than we were to start the year. Certainly rates have gone higher. So if we look actually at the yield of the MBX triple C, we're back about above 6% like 6 and a quarter and we've kind of been-- and bouncing around between six and seven percent since the Russia invasion of Ukraine back in 2022. That compares to basically the entire period of the zero interest rate policy. So let's say from GFC up until the pandemic where yields of the MBX-Triple C sort of went between four at the spikes of spreads up to six. So we're still kind of a hundred, 125 basis points over above the average yield of that's their period. So to be sure the tight spreads have been constant compensated here by the higher treasury rates that we see. And the investors are still kind of feeling like the all in yield is justifying risks when they're pretty comfortable with the sovereign fundamentals. Your last question is growth enough to continue to anchor us here? Well, the results we've seen the first half of the year, the answer has to be yes. I mean, despite the fact that we have, you know, monetary tightening starting to be priced in, despite, you know, the most stark geopolitical risks we've seen since that Russia invasion of Ukraine, spreads are tighter. So I think it really does have to be something which is going to knock the growth narrative off its tracks for us to be, to see at least a catalyst for significant spread widening, even though the valuations are staring us on the face is very tight. And to wrap up, what are the events that the MIM investors should be watching for the remainder of 2026? For example, we have that metronome elections to use the implications for emerging markets quite broadly. Or there are some EM elections that may have conceptual results for markets. Yeah, I do think the US midterms, which have really been off the radar, at least going to start to enter into the narrative. The market, of course, given this reflation dynamic we've seen, is at the moment a lot more focused on the Fed. But I think once we get into the summer months and into the fall, the US midterms are going to be staring us in the face. The sort of policy angles that were very important for us in sort of a more binary way. Of course, we had the presidency at stake two years ago. Had a lot to do with trade, had a lot to do with fiscal policy. It's kind of hard to see any result here, barring the most surprising result, which would be somehow we have another sort of red wave. And right now, I think prediction markets in the like are expecting to see at least one house foot to the Democrats. Probably those big picture policy angles are going to be a little bit less sort of with a little less beta in terms of a little less delta in terms of how much change we can see on them. I do think in terms of some of the geopolitical stories that have been important for EM. And particularly even in South America, we saw the Trump administration's very strong support for Argentina. Now what's going on in Venezuela? I don't think that we're going to see the Trump administration sort of back down on any of those progatives as it heads into the last two years of its mandate, no matter what the election is. But we can't probably see some market starting to think about what might happen after 2028 in terms of some of those narratives. Now in terms of EM directly, yeah, I do think the election calendar is going to continue to be important. We've gotten through some big ones, particularly again, in South America with Peru looking like it's finally-- looks, it looks like we know who the winner is going to be. Let's see. There's still some counting to be done. In Colombia, we have a second-round election coming up in just a week. The first round delivered a victory for the right of center candidate. And so far, polling suggests that we can have a change in the administration going ahead in Colombia. But that's been important for driving market dynamics. And then I think we're going to all start to focus on the big one, which is Brazil's election presidential and parliamentary election. In the fall, I think emerging market practitioners are all going to get a little bit of Brazil local scrutiny on every angle of that election and every angle of the policy outcomes that could come out of it as we head closer to that election. And that looks like it's going to be a very competitive race. With at the moment, Lula still looking like he could have another term. But of course, there's a lot to play here. So I think all the AMASA classes are going to be watching that Brazil election. Thanks a lot, Ben. Thanks a lot, Daneshka and Anora. This brings us to the end of our JP Morgan at any rate, emerging market focus podcast. We invite clients to take a look at mid-year outlook emerging market, Silicon Strati, JP Morgan markets, and reach out if you have any follow-up questions. This communication is provided for informational purposes only to refer to JP Morgan Research reports related to its content for more information, including important disclosure. 2026 JP Morgan Chase on Company, all right to serve. This episode was reported on 15 June, 2026.