Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 61
THE DRUMMER'S EAR | RHYTHMIC REASONING
if expectations of slower economic growth materialize alongside an
increase in the debt-to-GDP ratio from 49.2% to 52.3% in 2026,
issuers with stronger credit profiles are best positioned to execute
refinancing strategies effectively. Infrastructure-related issuances
could be particularly relevant, as the government’s development
pipeline includes projects tied to energy infrastructure, or even the
FIFA World Cup 2026 and urban expansion initiatives in key regions
such as Monterrey, Guadalajara, and Mexico City.
Given the persistence of macroeconomic risks in the United States,
a tactical asset allocation to Emerging Markets continues to serve
a strategic position within diversified fixed income portfolios. In EM
local currency debt, the global depreciation of the U.S. dollar has
provided some breathing room for central banks. Stronger local
currencies have helped ease imported inflation pressures, giving
policymakers greater scope to continue with monetary easing
cycles. This FX dynamic adds an important layer to the regional
outlook, particularly as inflation continues to moderate and real
interest rates remain relatively elevated across several economies.
CHILE: CAUTIOUS OUTLOOK GIVEN INFLATIONARY PRESSURES
The Central Bank of Chile (BCCh) kept its policy rate unchanged
at 4.75% in the September meeting, following a 25 bps cut in
July. The 3Q25 Monetary Policy Report (IPoM) presented a more
constructive outlook for activity and investment, with domestic
demand—particularly private consumption and capital formation
—surpassing expectations. Growth forecasts were revised up to
2.25–2.75% for 2025 and 1.75–2.75% for 2026, supported by
stronger investment momentum and resilient demand.
Inflation has eased broadly in line with projections, but core
inflation remains above target, sustained by robust demand,
higher wages, and a weaker peso. Headline CPI is now expected
to converge to the 3% target by 3Q26, later than previously
projected. Externally, conditions have improved on looser U.S.
Fed expectations and stable copper prices, though risks remain
elevated, including persistent U.S. inflation, domestic fiscal
vulnerabilities, and global trade tensions.
In this context, the BCCh adopted a more cautious stance,
emphasizing that additional easing will depend on clear evidence
of declining underlying inflationary pressures. Market pricing now
reflects a slower pace of cuts, with the policy rate expected to end
2025 around 4.50%.
EMERGING MARKETS: LOCAL DEBT WELL POSITIONED
Emerging market debt has delivered strong performance year-todate, continuing to stand out within global fixed income. Higher
real yields and resilient fundamentals, combined with ongoing
monetary easing, have supported robust returns: local currency
debt is +14.3% and hard currency debt +8.5% as of the end
of September (to be updated). The structural weakening of the
U.S. dollar has further reinforced the case for EM exposure, as
local currencies appreciate and attract renewed flows from global
investors seeking diversification beyond U.S. assets.
Looking ahead, EM growth is expected to moderate, but
disinflation and limited fiscal space should keep central banks
on an easing path, supporting local markets. After four years
of negative flows, positioning remains light, leaving room for
dedicated buyers to re-enter as global portfolios rotate away from
dollar-centric allocations. With high absolute yields, improving
creditworthiness, and a macro backdrop increasingly supportive
of capital flows, EM debt, particularly local markets, appears well
positioned to deliver diversified growth and resilient returns in the
quarters ahead. Key risks include a sudden USD rebound or a
deeper U.S. growth slowdown, which could challenge sentiment,
but the overall setup remains constructive.
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