Emerging Markets Take the Wheel
The OECD’s latest Economic Outlook presents a global economy that remains resilient, though increasingly strained by rising trade barriers and persistent policy uncertainty. Global growth is forecast at 3.2% in 2025, easing to 2.9% in 2026, with the OECD warning that this path is vulnerable to escalating trade tensions and possible market corrections if current AI-related optimism does not fully materialise.
In the United States, the OECD expects growth to slow to 2% in 2025 and 1.7% in 2026 before edging back to 1.9% in 2027. The moderation reflects cooling employment growth, sharply lower net immigration, the tariff-induced rise in consumer prices, and significant cuts to non-defence discretionary spending. As these effects fade and disinflation resumes, activity is projected to move back toward potential. A key downside risk is an equity market correction, given valuations supported by expectations of strong AI-driven earnings, though genuine AI breakthroughs could deliver upside. With labour market risks rising and underlying inflation appearing contained, some monetary easing in 2026 may be warranted. Fiscal policy remains on an unsustainable trajectory, requiring a multi-year consolidation alongside reforms to increase housing supply, upgrade infrastructure, and ease labour shortages.
China’s growth is projected at 5% in 2025, slowing to 4.4% in 2026 and 4.3% in 2027. Consumption is expected to soften due to elevated precautionary savings and the unwinding of recent durable goods incentives. Property investment and prices are likely to decline further as excess capacity is absorbed. The government’s anti-involution campaign is set to moderate business investment, though infrastructure spending should strengthen under the new Five-Year Plan. Export performance will remain constrained by higher US tariffs. Key risks include industrial overcapacity and persistent trade uncertainty, while new reforms could bolster private investment. Monetary policy remains supportive but constrained by pressure on bank profitability, leaving fiscal policy to play a larger role.
Emerging Markets remain the brightest part of the global outlook, with Emerging Market and Developing Economies projected to drive nearly two thirds of world growth over the next decade. Improved policy frameworks, stronger reserves, favourable demographics, resource endowments, and rapid digitalisation continue to support competitiveness, led by India, the fastest-growing major economy.
This environment continues to support our EPIC Fixed Income strategy, which favours wealthy, undervalued EM sovereign and quasi-sovereign bonds. Notable examples include Pemex 2050s, up roughly 29% year-to-date (end-Nov), supported by strong government backing; similarly, Mexican utility CFE 2052s, have rallied 19%; the Saudi PIF-issued green bond, GACI 2052s, returned ~15%; and the strategically important Abu Dhabi Crude Oil Pipeline 2047s, up about 12%. Even credits that have moved closer to fair value, such as Chile’s state-owned Empresa Metro 2050s, have posted gains exceeding 14%. Taken together, these results highlight the compelling opportunities still available in select EM credit, particularly where balance-sheet strength and sovereign support remain under appreciated by global markets. By comparison, the Bloomberg Global Aggregate Index has returned 5.08%, underscoring the relative strength of select EM credit opportunities.
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