November 2025 EMD Review and Outlook: positive performance due to more dovish Fed and weak dollar

Market review 

Emerging market (EM) debt posted positive returns for a fourth consecutive month in November. Shifting market expectations on US monetary policy guided performance, with risk assets experiencing an initial sell-off before recovering towards the end of the month. Higher-risk frontier sovereigns (1.2%) [1] outperformed hard currency sovereign bonds (0.4%) [2], while corporate bonds (0.2%) [3] delivered a more modest return. Local currency bonds (1.4%) [4] emerged as the top performers, owing to a weaker US dollar over the month.

Market sentiment regarding a potential interest-rate cut by the US Federal Reserve in December was a key driver. While expectations for a December rate cut waned early in the month, they increased again following the release of weaker US economic data. As a result, the 10-year US Treasury yield fell by six basis points to 4.02%, representing a fourth consecutive month of lower yields and supporting returns for hard currency bonds. Meanwhile, the price of Brent crude oil fell by 2.9% to US$63.20 per barrel. This decline was primarily due to increased market supply, with record US crude production and steady supply increases from OPEC+.

Selected country news

November was another busy month for elections in EM countries. Iraq's Prime Minister Mohammed Shia al-Sudani appeared to secure a parliamentary election victory. However, forming a government is expected to be a lengthy process as Sudani will need the support of two-thirds of parliament, which took roughly a year in the last elections in 2021. In Chile, the first round of the presidential election saw leftist candidate Jeanette Jara take the lead with 27% of the vote, followed by right-wing candidate José Antonio Kast with 24%. Honduras held elections at the end of November, with preliminary counts indicating a close contest. The results indicate guaranteed political change, as the ruling party candidate fell to a distant third place behind the National Party and the Liberal Party.

There were significant developments regarding the Russia-Ukraine conflict over the month, as the US and Russia directly negotiated a 28-point peace plan to end the war. US President Donald Trump issued Ukrainian President Volodymyr Zelensky a deadline of Thanksgiving to accept the proposals. However, he faced strong pushback across Europe and within Congress, which resulted in some softening from the US. American and Ukrainian officials subsequently met in Geneva and significantly revised the initial peace plan, reducing it to 19 points and amending provisions that Ukraine had previously deemed unacceptable. These included major concessions to Russia, such as limiting Ukraine's aspirations for the North Atlantic Treaty Organisation and territorial compromises. Ukraine agreed to the updated 19-point plan, but optimism was tempered by reports suggesting that it was likely to be rejected by Russia.

Turning to trade developments, the US announced the establishment of trade deal frameworks with Argentina, Ecuador, El Salvador and Guatemala. These agreements involve the participating countries granting preferential market access to a range of US industrial and agricultural exports. In return, the US will offer reciprocal tariff benefits for selected exports from these countries. A US-India trade deal is also likely to be finalised by the end of the year. The bulk of the agreement, which covers core issues such as agriculture and industrial goods along with India's effective tariff rate, has largely been completed.

On the environmental front, Brazil hosted the 30th United Nations Conference on Climate Change (COP30). The conference brought together global leaders to discuss pressing environmental challenges and to coordinate actions to address climate change. Meanwhile, Sri Lanka suffered devastating flooding as Cyclone Ditwah struck the country, marking the worst such event in two decades. The cyclone served as a stark reminder of the profound impact that climate change continues to have on EM countries.

The trend of sovereign rating upgrades continued this month. In Africa, Standard & Poor's (S&P) upgraded Ghana to B- due to stronger exports, fiscal discipline and projections for declining inflation. S&P also upgraded South Africa to BB with a positive outlook, citing the country's improving growth and fiscal trajectory. This was South Africa’s first upgrade in nearly two decades. Additionally, S&P upgraded Zambia to CCC+ from selective default. Fitch also upgraded the country’s rating to B-, which ended five years of being labelled in default. It cited improved creditworthiness as Zambia has entered an advanced stage of negotiations with its remaining commercial creditors.

Meanwhile, Senegal was downgraded for a third consecutive time to CCC+ by S&P, owing to the country’s precarious public finances. Elsewhere, S&P upgraded Uzbekistan to BB, given sustained improvements in macroeconomic policymaking, and Kuwait to AA- on expectations that the country’s public and external balance sheets will remain strong. Lastly, S&P downgraded Bahrain to B, reflecting the country's fiscal struggles and elevated indebtedness. This was Bahrain’s first downgrade since 2017.

Outlook

We continue to see value in the high-yield and frontier markets. While spreads remain tight, they are supported by structural reforms and multilateral support; certain credits on the fringes of rating buckets look attractive where we think risks are overpriced. The slowdown of the US economy should support a US Treasury rally, so we have reduced our underweight in investment-grade bonds.

In EM local bond markets, while many mainstream EM rate-cutting cycles are mature, central banks are likely to continue easing as growth slows, inflation remains near target and policy rates remain high relative to historical averages. We are still overweight in Latin America due to attractive real rates in the region, and we expect more rate cuts to come from frontier market central banks. Moreover, we have increased our overweight in EM currencies, with a particular focus on Central European and frontier market currencies. Additionally, we have expanded our exposure to frontier market local currency bonds to take advantage of the delayed rate-cutting cycle in some countries.

For EM corporates, credit fundamentals remain supportive, and the direct impact of US tariffs within the investible universe should be limited. Net supply should fall as EM corporates continue to pay down their bonded debt. As global economic growth slows, we are likely to see downward adjustments to operational performance; however, leverage levels remain low and interest coverage is healthy.

The biggest risks to the EM asset class include the imposition of new tariffs, which could threaten EM exports and lead to policies that leave EM countries disadvantaged. There may also be heightened uncertainty if the US Supreme Court strikes down tariffs under the International Emergency Economic Powers Act. A US recession and a further downturn in the Chinese economy could weigh on commodity prices, particularly oil. Conversely, a further steepening of the US Treasury curve may raise financing costs for frontier issuers and limit access to the primary market. Geopolitical risks also remain heightened, there's no end in sight for the Ukraine war and tensions in the Middle East have dampened but not disappeared.