Q4 EMD Outlook Rethink the narrative
In Short
MACRO: Taking stock on three key themes for 2025
I. Peak US exceptionalism: Pausing. Reduced policy uncertainty, resilient growth, reduced fiscal concerns due to tariff revenues and an AI investment boom means US growth estimates are being lifted. Chinese momentum disappoints as fiscal stimulus remains measured → EM-DM (ex. US) growth gap should widen, EM – US more sideways (RHS).
II. Peak policy uncertainty: On track. Trade uncertainty is high, but falling. US effective tariff rate most likely settles below its recession threshold. Trump’s pressure on Fed should be about to peak as he’s underperforming on inflation in the eyes of voters (no.1 concern).
III. Peak growth pessimism: For now, mostly a DM story as China’s stimulus cycle slows. US recession probability falls as monetary conditions ease, oil price is low and labour lags.
• Two-sided RISKS: Overheating/stagflation & recessionary reflexivity (US job market).
MARKETS: Solid 12M returns - shifting down into year-end
Don’t extrapolate: Monetary easing and peak policy uncertainty supports EMD, but growth rebalancing takes a breather → positive, but lower EMD returns towards year-end.
Rethink the narrative (I): Tactically moving hard currency to overweight form neutral as support for EM FX from peak US exceptionalism fades and USD weakness is consensus.
Rethink the narrative (II): Structural shifts (higher inflation, level-shift higher in geopolitical uncertainty, higher fiscal leverage) create a more uncertain investment environment. These shifts are driven out of DM, not EM → EMD performed because of elevated uncertainty, not despite of it. Longer-term, these shifts should benefit local currency debt, in particular.
