The US tariffs “Liberation Day” on 2nd of April took most investors and the financial markets by surprise, given their much larger than expected magnitude. However, after several days of severe selloff, markets found a reprieve when the tariffs were scaled back to 10% (for a 90-day period) for all countries except China. The US-China relationship, both economically and politically, looks set to remain strained and at the time of this writing, the effective tariff rate implemented by the US on Chinese imports stands at 125%, while China has increased its tariff on the US to 84%. At this juncture, we think on the one hand uncertainties may stay elevated and the potential supply shock to the US economy can be worrying; on the other, many investment opportunities have been created following a reset wider in credit spreads.
For Emerging Market (EM) sovereigns, the outlook for US inflation and growth and related monetary and fiscal policy paths will be important for the asset class. Commodity prices, especially oil prices, are also pivotal for the asset class, especially for higher risk commodity exporting countries in Africa. However, many of these African economies continue to work with the IMF, with ongoing structural reforms in exchange for funding support. Another successful reform story is Argentina in Latin America, where we maintain a bullish stance. We also view a ceasefire between Russian and Ukraine being rather likely in the second quarter of this year, which should boost the overall investment sentiment and with emerging European countries to benefit the most. Against the headwind caused by US tariffs, we have actually turned more constructive on China. China’s policy makers continue to roll out growth supportive measures, including measures to encourage domestic consumption. The meeting between President Xi and businessman Jack Ma has boosted corporate and business confidence. The problematic real estate sector is finally bottoming out. Chinese AI company DeepSeek will continue to have wide ranging positive impact on the Chinese economy; and China currently has the upper hand versus the US in terms of global innovation, with the majority of patents being granted worldwide being awarded to China. The latest records show that 46% of patents granted world-wide were awarded to China in 2023.1
Figure 1: Global Patent Grants by Region
Sources: World Intellectual Property Organization (WIPO)
EM corporates overall have been running prudent operational and financial policies, which has led to abundant interest rate coverage ratios and low net leverage ratios. One encouraging observation is that, as the markets acknowledge that most negative shocks have been self-inflicted by the US, EM credits have outperformed US credit. For example, based on the ICE BofA Global High Yield index, The EM High Yield segment has delivered flat year-to-date return (-9bps as of 9th April), whereas the US segment has delivered a negative 177bps return for the same period.2 Therefore, from an asset allocation perspective, EM corporates’ resilience and strong diversification benefit continue to support an allocation away from the US and into other parts of the world.
As of April 30, 2025
Source: JP MORGAN
As of April 30, 2025
Source: JP Morgan
Looking ahead for EM corporates, we like the Latin America high yield segment. Relative valuation has improved for high quality BBs in the segment given the recent selloff and increased volatility. As a result, we believe that opportunistic entry points will arise as we progress through 2025. Moreover, Asia and the EU have been hit the most by Trump’s reciprocal tariffs, while the relative impact to Latin America has been less severe. There are other bright spots outside of Latin America, such as Turkey which has been less affected by US trade policies. Sectoral wise we like financials, as most EM banks are well run and their spreads have proved to be resilient. While the outlook for the energy sector may be challenging, we see selective bottom up opportunities there. We generally prefer Exploration and Production companies to integrated energy companies. There are regional and credit differentiations within the airline sector, against a potential global growth slowdown. We prefer Turkish airlines to Latin American ones.
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