EM credit and stagflation risks (with Abeer Abu Omar)

Asks what prolonged Middle East fighting means for risk premiums and the credit outlook in EM.

Abeer Abu Omar

Victoria Harling

Markets have dealt with many black swan events and are taking risks in stride. The biggest impact is on global inflation dynamics. Growth is holding up (US jobs data). Spreads have compressed to compensate for interest rate dynamics, and going forward, overall yield will be a determinant.

Looking at the jobs data we had in the US, it is encouraging that growth is holding up okay.

Asks if EM sovereigns and corporates are better positioned than DM peers for higher-for-longer rates.

Abeer Abu Omar

Victoria Harling

100%. EM central banks have responded carefully, balancing growth and inflation risks. Since last year's tariffs, there has been a rational response with positive fixed income inflows. EM growth looks reasonably robust.

We've seen more recently equity market outflows, but fixed income inflows have been strong. This pairs back to more rebalancing of domestic flows back into home markets, which is helping central banks.

Asks if the equation becomes a comparison between EMs rather than DM vs EM.

Abeer Abu Omar

Victoria Harling

AI is the real distinction. In the Middle East, corporates are very robust with the lowest default rates of any region. Growth in the Middle East outshines many regions despite the conflict, due to government spending on diversification.

You would expect the Middle East to be suffering the most, but actually it isn't.

Asks what the biggest risk to EM sovereigns and corporates is in 6-12 months.

Abeer Abu Omar

Victoria Harling

Global growth sentiment. New trade discussions, more tariffs, and developments on USMCA are key. There is a strategic move to a multi-polar world where EMs do business together, pushing away from just the West. More tariffs, inflation, and pressures on global growth will weigh on the global economy.

What you are seeing is a strategic move to a multi-polar world where emerging markets are very keen to make sure that they do business together.

SignalTube