In our view, it is a watershed moment for emerging market local currency debt. The asset class has performed exceptionally well despite the challenging external environment over recent months, anchored by two factors. First, the credibility of emerging market central banks has never been higher; policymakers have been assertive, tightening far ahead of developed market contemporaries, as post-pandemic inflation pressure emerged. Second, emerging market treasury managers have heeded lessons from the past, reducing reliance on financing in hard currency debt; by prioritising issuance in local currencies, targeting deep-pocketed locals, most emerging markets have reduced their vulnerability to “hot” capital outflows. As a result, we believe there is a new dawn - emerging markets have matured into a reliable and stable asset class.

The key question: how will local currency emerging market debt evolve this year?

From a global growth perspective, we believe that emerging markets are in a good place. We do not subscribe to the narrative that the global economy is heading for a “hard-landing”. Sure, global growth is moderating, but any near-term slowdown will likely be shallow and temporary. The real story is that structurally, global growth is likely to remain buoyant, where we anticipate an elongated technology-led and rivalry-fuelled multi-year economic expansion led by the US and China. The emerging market economies are well placed to benefit from the spill-over from this growth dynamic. This view is shared by the most recent IMF forecasts, which raised growth premium for emerging economies relative to developed economies at around +2.5% over the next five years.

There is also much to like about the inflation calibration when it comes to the emerging markets. The great inflation surge has gripped the investment community over the last 18 months. It is no surprise that this inflation pressure showed up first in the emerging markets; many of these economies tend to be small, open, and highly sensitive to external factors. There is clear evidence that inflation has already peaked in emerging markets and is already in the process of rapidly decelerating in many cases. With inflation in the rear-view mirror, we believe that the vast majority of emerging market central banks have brought their tightening cycles to a close, with the market now pricing rate cuts over the course of next year for many. With peaking inflation and pivoting central banks, global capital is likely to be pulled back towards emerging market local currency debt.