1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 145
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Emerging markets – 2025 sets the stage for further performance in 2026
2025 Return
18%
EM LC
EM HC LatAm
14%
EM HC
10%
U.S. HY
Global Agg
U.S. IG
6%
6.4
6.6
5.9
2.8
6.3
6.8
Average Duration (yrs.)
Source: Bloomberg Finance LP, Scotia Wealth Management
LC: Local currency, HC: Hard currency, HY: High yield, IG: Investment grade, Global Agg: Aggregate. Priced as of December 31, 2025.
The 2026 outlook for EM debt remains broadly constructive. Expectations for further U.S. Federal
Reserve rate cuts could continue to weigh on U.S. yields and the dollar, supporting EM assets.
While monetary easing cycles in EM are advanced in several countries, additional room for
monetary accommodation remains as inflation moderates and policy rates converge toward
neutral levels. Medium-term fundamentals are also supportive, with gradual economic growth
acceleration, improving fiscal balances. and broadly favourable currency valuations, alongside
potential multiple sovereign rating upgrades.
Within EM, Latin America stands out as the differentiated opportunity set. Elevated interest rates
continue to offer attractive carry, while a weaker U.S. dollar and normalizing inflation have
supported currency appreciation and further monetary easing. Although the region offers scope
for further rate cuts in 2026 in the two largest countries in the index – notably Brazil and a further
cut in Mexico – fiscal and political risks remain relevant in select markets ahead of several
upcoming election cycles.
Notwithstanding the good performance delivered in 2025, emerging market fixed income
continues to represent a compelling opportunity within diversified global portfolios into 2026
given the absolute level of rates.
Private credit: discipline and quality are never out of style
While this Global Outlook Report largely focuses on the public markets, in collaboration with GIS’s
Pooled Investment Vehicles group, we wanted to address the concerns – and noise - surrounding
the private credit markets that have garnered headlines of late. The lines between public and
private credit continue to reshape credit markets as the private credit opportunity has expanded
rapidly over the last 10 years – growing at a 15% CAGR over the past 15 years for both investors and
funding.
Fixed income investors have been drawn to private credit due to the return premium they can
achieve compared to public market equivalents. In exchange for the high return potential, private
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