Stephen Rudman: Good morning and good afternoon. My name is Stephen Rudman. I am a member of the Ashmore New York-based Client team. Welcome. I hope all are enjoying the beginning of the holiday season and staying warm if you're here in the US. 

Thank you for joining today's Ashmore's Webinar 2026 Outlook. Today will be driven by Gustavo Medeiros, our Global Head of Research, as well as Ben Underhill, who's a Research Specialist. Ben works very closely with Gus, working on our vision of where we think markets are going and obviously most particularly in emerging markets (EM). So, thank you both for joining. 

We're going to cover a broad range of topics today, which should take about 30 minutes or so. We have six major topics, just to give you some frame of reference. As always, we start with what happened in 2025, set the stage. Obviously, it has been a pretty good year, so there's some good things to talk about. Next are the themes of in 2026 in terms of outlook, and conclusions moving forward of what we think we really need to focus in on and what you may want to be thinking about, for what asset classes we prefer in emerging markets, looking at geographies where we think there is real opportunity. Obviously, EM is a very diverse marketplace, and it doesn't mean the opportunities are equal across the board, they are not. So, we'll spend some time with that. And then, we'll finish up with a bit of a summary and what are the risks, where can we be wrong, what is potential downside, etc. 

With that, let's get started. Again, thank you for joining. Let's get to it. Gus, we're going to start with what I had noted. Let's start with a review of 2025. Again, I know our existing clients and our prospects have been engaged in EM much differently than they had in the past five years, and with good reason, obviously lots of good returns. So, give us a little review and get us kicked off.

 

Gustavo Medeiros: Thank you, Steve, for the intro. Thanks, everybody, for dialling in. It's great to have Ben with me. You probably saw his name is in almost all, if not all the reports that we have been putting out, so you know that he's doing a huge amount of work in the background. So, now, we can see him live as well and hopefully meet him in person over the next couple of quarters, years.

Well, brief review of 2025. We've had a year that was pretty bumpy, turbulent, but not very different than what we expected. The first topic of the year was tariffs. They came and went, as we expected. The important element is that global gross domestic product (GDP) growth remained resilient, better than feared, I think, is the appropriate expression. Tariffs increased significantly, pushing the weighted average towards 14.5% ballpark or 12% all substitution right now according to the latest Yale Budget Lab report. But the global supply chains proved very resilient and flexible. There was a lot of anticipation of imports ahead of that, that prevented the much-feared economic disruption. And importantly, as we pointed out, tariff revenues have been helping to reduce the US fiscal deficit, which actually contributes to the US fiscal consolidation, the first consolidation in eight consecutive years. 

The US-China relationship was a second important topic, that has improved actually after it was clear China has a lot more leverage than thought in terms of the trade dispute, via rare earths in particular. Perhaps the US and the rest of the world don't have a huge amount of supply alternatives to China. And as we've been noting over the years, it's going to take a long time to rebalance the economies away from China to reduce the dependency from China imports. 

Importantly, more recently, the relationship between these two parties have been improving significantly as the US acknowledged China's leverage in rare earth and strategic metals. I think it's not an exaggeration to say that China currently has escalation dominance in trade dispute matters until the West can find an alternative way of getting these strategic metals. And this acknowledgement basically paved the way for a more stable and constructive dynamic. We've seen a reduction in tariffs to China that is lower now than levels that all analysts expected at the beginning of the year. 

The third point, the budget approved on the 4th of July. The OBBBA, One Big Beautiful Bill Act, put a lot of incentive for investments, which alongside the artificial intelligence (AI) euphoria is setting the stage for a pretty strong boom in investments. Remember, the investing incentives are very much focused on tax benefits from manufacturing capex and research and development (R&D). To be precise, companies can fully deduct costs of R&D and manufacturing capex on the first year, which incentivises front loaded of capex. And these incentives, alongside of the AI euphoria has been triggering a pretty strong environment for capital expenditure in the US in particular, but in technology more broadly that have been having positive effect on emerging markets, in particular EM Asia. 

The fourth point I think that is important to highlight as we also expect that geopolitical risks started to deescalate, particularly in the Middle East. Overall, geopolitical risks are starting to bring greater global stability. We've had the ceasefire in Gaza, we have a better political equilibrium in Syria and Lebanon, which are important players in the Middle East. We're importantly now talking about the normalisation of the relationship between the Gulf countries and Israel mediated by the United States. Obviously, geopolitical risks remain with us. There are hotspots that are new, like Venezuela. But even there, we can actually have a relatively market-friendly resolution. 

Finally, I think it's important to highlight that we had a massive outperformance of EM assets. EM fixed income assets outperformed for the third consecutive year. That includes EM local currency bonds which are an investment grade asset class, which has outperformed global investment grade for the third year. EM sovereign high yield outperformed US high yield for the third year and EM equities outperformed developed market (DM) equities for the second consecutive year. EM equities are up 31.7% year to date. DM ex-US is up 28.7. It's the first outperformance over US stocks since 2017. US stocks are up by 17.8% year to date. Interestingly, over the last 27 years, EM equities outperformed DM ex-US by 17 times. So, this is very much against what people have in their mind. And it outperformed the US by 13 times, so nearly half of the times if you include 2025 here.

Stephen Rudman: Gus, thank you very much. Nice review. So, obviously, many of our clients are thinking, "Okay, 2026, great year. MSCI EM equity, 30%, give or take a couple of bps, here or there, year to date, does it continue?" Or is this a little blip in between obviously less dramatic performance? So, let's kick it off. Let's talk about what the main themes are for 2026.

Gustavo Medeiros: I think the most important theme to come in 2026 is no longer macro. It was a challenging outlook to put together as macro analysts that Ben and I are. We had to rely a lot on our conversations and insights from our equity colleagues. 

But the way we see AI today, there are two forces. One could be potentially disinflationary to the extent that technologies are disinflationary. You can do more with less. Or it could be inflationary if there is too much capex that is starting to hit the boundaries in the real world, such as a shortage of energy, of capital, of metals, for example. And the way we see the sequencing of it is AI is likely to be disinflationary before it's inflationary, primarily via the labour markets. And there's a very simple reason for that. Over the last three to six months, we already seeing in the company results, in the labour markets reports, in the private sector in particular, that there has been a lot of pressure in the labour markets in the US. 

It's not only a supply side situation, but also not only that you have less immigration numbers. And we're actually seeing ADP, for example, or Challenger Jobs Cuts, at levels that are significantly lower, that typically leads to an ongoing deterioration of the labour markets. And if that happens, then obviously, policymakers will have to react to this inflationary/deflationary impulse. 

So, I think that the first half of 2026, most likely we start getting these inflationary shocks. Inflationary bottlenecks may be hit towards the second half of the year or maybe 2027, depending on how fast AI adoption takes place and escalates. In particular, the adoption via high data and energy-consuming technologies, such as self-driving cars, for example, or humanoids, being adopted pretty much across the board, not only being tested. 

The second important theme is that China keeps exporting deflation to the rest of the world. China continues with its export-led growth model, which has been driving a disinflationary impulse for the world for maybe 20, 25 years. We were hoping for a much clear input, much clear push for China to rebalance its economy. But the Fourth Plenum to the 15th five-year economic plan that was unveiled a month ago suggested that they are actually doubling down on this model of export-led, particularly in the high value-add manufacturing space. 

So, that, alongside of the rerouting of exports from the US to the developed world, ex-US, and the emerging market countries, means that we actually keep getting more disinflationary pressure to Europe and emerging markets as well. Notwithstanding this growth push actually, Chinese equity markets can keep on performing well. It's worth remembering that 40% of the stock market in China is technology and more than two-thirds of its components are high quality companies that are very different than the old traditional economy. 

So, if we add up the first two themes, AI is going to be disinflationary before inflationary, and China will keep exporting deflation to the rest of the world. Alongside of the fact that you still have positive real interest rates across most countries in emerging markets and across a significant number of DM economies, we think that this debasement narrative is stale and wrong. So, that's the third main theme. We think that if you look at the debasement narrative was very powerful and really accurate in 2020 and 2021, when we had massive monetary policy and fiscal policy coordination, injecting a lot of liquidity in the system, leading to a very sharp spike in inflation, which helps to erode debt-to-GDP pretty much everywhere in the world. Today, I think we're in a very different part of it, but the markets are offside. The market is not pricing that in. 

Fourth theme, already mentioned, geopolitical risks are declining, not increasing, but Europe will keep on re-arming. If you look at the general trend, we've seen Europe pushing for a very strong effort towards increasing investment in its defence industry. There's a pan-European push for EUR 150bn  commitment and a Germany push that encompasses defence, infrastructure, and energy, adding up to EUR 1trn of investment over the next 10 years. That is going to significantly benefit Eastern European countries, which we think is a good place to be.

The fifth theme that I think is important that EM ex-China growth is still wide and vis-a-vis the developed world. It's the third consecutive year that we're going to see EM growth ex-China increasing at a faster pace than the developed world growth. And we see growth risks as skewed to the upside vis-a-vis consensus expectations across very large key economies in emerging markets, including places like India, Indonesia, Mexico, Brazil, perhaps even China as these export-led model is likely to be successful.

Ben Underhill: If I could just quickly chime in, part of the reason that we see risks to the upside for growth across EM is anchored in our second theme in the exportation of Chinese deflation to EM. So, that's going to be most concentrated in China's key trade partners, which are primarily in North Asia, but it can also be a cascading deflationary effect even to countries in the LatAm region, for example. 

And also, a key trend that we're seeing this year is food inflation coming down a lot from where we saw it last year, which is at very elevated levels. The clearest example of this has been in India where consumer price index (CPI) inflation is now running close to zero because you've got food inflation in negative territory. We think that this trend can continue, which should bring headline figures down and allow central banks to cut rates further, which can provide that upside to growth versus consensus in 2026.

Stephen Rudman: Thank you, both. Very helpful. All right, so now that we've set the stage of the themes to which we think are likely to be drivers, what are the market conclusions, Gus? What does it tell us about where we should be looking for movement in terms of price opportunity, etc.?

Gustavo Medeiros: The first one is that bonds are a good place to be. You should be looking to receive rates. We think that the US and the UK rate cuts are mispriced, that probably the central bank delivers more than what's priced in at the moment. We think the asymmetry is generally on the downside to yield, therefore you have more upside to bond prices. 

As Ben pointed it out, as food inflation declines in EM, if the US is cutting monetary policy more than expected, a lot of EM central banks will have a lot more room to cut monetary policy by more than people expected. Just like what we're seeing in India at the moment where the Reserve Bank of India (RBI) has surprised market consensus by easing monetary policy more dramatically. 

As Ben mentioned, a disinflationary environment gives a central bank a lot of room to ease and more than priced, therefore have a symmetry. And the potential AI-driven joblessness would force the US Federal Reserve (Fed) to cut rates towards maybe below 3% in 2026. We think that it's hard to foresee how things will evolve exactly, but again, we think that there's more symmetry to downside and yields. 

If then, if we managed DM money, I think that there is an opportunity where you should be receiving Treasuries and UK Gilts against German Bunds because of this massive issuance of bonds that are coming out of Europe, contrasting with much more mindful finance ministers – the Chancellor of the Exchequer in the UK, and the Treasury Secretary in the US – which are actually trying to change issuance plans and announce budgets that are friendly towards duration. 

We also think that eventually, the Bank of Japan (BOJ) is going to have to hike more aggressively than people expected initially, but eventually, towards mid-2026, they'll pause the hikes and the long end of the curve is very, very cheap there. So, that's an opportunity that's important because that weighs on bonds across Asia. So, that's why we monitor these factors. If the Fed cuts more than priced, the Dollar should be for sale. 

That's a third point. Particularly, if there is a question over the Fed's independency and we know that there is a change of guard in the Fed in May, we're likely to get an announcement perhaps by January. In January, the Fed is perhaps not going to cut policy rates because of data issues or because they want to pause after 75 basis points of cuts including December. And if we do have a new Fed Chair that is perceived to be more dovish, we could actually see the curve steepening and that typically is negative for the Dollar. 

So, these two factors, the Fed, which has more fundamental leeway to cut more than expected, and the fact that the market will perceive the new Fed Chair as potentially, politically motivated, would be putting the Greenback under pressure for the second consecutive year, whereas actually the Greenback peaked in Q4 2022 in nominal terms. But the market perception is that it's been starting to sell off for real in 2025. A weaker Dollar also provides more room for global central banks to ease. 

So, in a nutshell, EM assets are in a very good place. If we have higher growth driven by AI, driven by higher capex, lower US Treasuries, and these lower US Treasuries and global yields should allow for an increase in breadth of economic growth, and the US dollar is for sale, that is a pretty good combo. So, again, away from debasement, think about more Goldilocks-like conditions rather than debasement, and the combination of higher EM growth than expected, lower US rates, weakening Dollar, allowing central banks to cut rates actually provide a pretty good backdrop for emerging market asset prices.

Stephen Rudman: Excellent. So, that really begs the question, so where do you put the money? Which asset classes in EM do we prefer? Local currency, hard Dollar, how does that impact equity with all the things that you've laid out and where should we be?

Gustavo Medeiros: So, this macro scenario paints a bullish picture primarily for local assets. We think that EM local currency bonds are the preferred asset class within the fixed income space. 

If you look at our total returns scenario analysis that are put out in our 2026 Outlook, you can see that there is more upside in EM local currency bonds and the downside is relatively limited. We actually see potential for double-digit returns in EM local currency bonds for another year. And it's not very hard to get to these numbers again because of how high carry is, how low currencies are, and the fact that real interest rates are at the highest levels in 15 years. This means that if central banks are easing monetary policy, you can have higher capital gains from bonds. 

In the EM equity space, we've outperformed in 2025 again for the first time after two consecutive years of positive earnings-per-share growth. We think that EM stocks are still undervalued, vis-a-vis the world ex-US in particular, but also the US, and with positive catalysts ahead. 

Despite the 2025 outperformance, the overall level of valuation remains relatively attractive, vis-a-vis these global asset classes. They typically offer an asymmetric return profile. If you look at different scenario analysis, Ben is going to touch on that when it comes to Latin America, for example. And we also have had significant positive catalysts that include structural reforms that explains why over the last three years, growth surprise to the upside in EM, vis-a-vis DM. It explains why we've had much more rating upgrades then downgrades over the last two years for two consecutive years, and therefore, the fundamentals have been improving.

I think that's a very different environment than we've been for quite frankly 15 years, where not only the valuations are very attractive and probably one of the most attractive in 15 years, but the fundamentals are improving quite fast in emerging markets. 

Importantly, you have much less concerns about EM, you know, debt and emerging markets sovereigns then in the developed world. EM local currency bonds have more upside than downside, as I mentioned. More asymmetry to the extent that there is more room for rate cuts than risk of rate hikes. And therefore, that leads to very strong total returns. 

Countries that are high-yielding, particularly countries that are delivering growth with high interest rates and where the currencies are still relatively undervalued. Brazil is an interesting one, notwithstanding some political drama that we're seeing. It's Brazil after all so we should be expecting some political drama. But countries like India, Indonesia, South Africa are also in a good place. 

And in Eastern Europe, we have, most of Eastern Europe actually have good potential total returns, considering that the currencies should be buoyant there. And yes, on the hard currency bond space on the fourth topic, yeah, credit spreads are quite tight and one of the tightest that it's been in 20 years. But if you look at the all-in yields that investors receive, the carry remains pretty, pretty decent. 

So, you should expect total returns to be on the high single digits, in our best-case scenario, which is a Goldilocks-like dynamics. But it's really hard to see negative returns in both downside scenarios of where growth, we have a growth scare, or the downside scenario that the Fed doesn't cut policy rates and potentially even price in some hikes. Because again, of the high all-in yield that we get that is priced in. So, if the Fed cuts with higher growth, that is bullish for high yield, obviously. But if the Fed cuts because, more aggressively because growth is surprising to the downside, that'll be more bullish for investment grade assets. Overall, I think that the asset class is in a pretty good place in terms of total returns.

Stephen Rudman: All right, thank you. Excellent. For the next topic, you started it by talking about some of the countries, but we're going to hand this one off to Ben to get more detail about favoured geographies and regions where we think the opportunity may be greater. Ben, over to you.

Ben Underhill: Thank you, Stephen. We see an incredibly diverse range of opportunities across EM next year. Like this year, we think we're going see another year of net credit rating upgrades in EM because of ongoing economic reform cycles. We've seen a lot of upgrades this year, particularly in the frontier space, and we think that can continue next year. 

But from a specific regional perspective, I would like to start by mentioning Latin America as somewhere we do really see asymmetric return opportunities in 2026. We've already seen a very good year of returns in Latin America, particularly in the equity space, where we've seen multiple countries post returns of close to 50% this year. However, came from very cheap valuations which have just started to recover. The key is that these markets still remain attractively valued. And in 2026, what we expect to see, is valuation returns broadening out into more earnings-driven returns. 

For example, Brazil consensus estimates for Brazi’s, EPS return, EPS growth next year in the equity space is close to 20%. Now, if we can see that play out, especially amidst the macro environment which is favourable with rate cuts likely taking place next year, we can see a very, very solid year of returns in Brazil. 

Latin America also offers great value, particularly in the local currency bond space. Very, very high real rates are still observable in numerous LatAm countries. For example, Brazil, Mexico, and Colombia and also very high carry. And when you've got an environment of a very high carry and also very high real rates and still scope for currencies to appreciate, that's a very asymmetric environment for returns in bond markets. 

The other thing I'd like to mention about Latin America, of course, is a political transition which is happening across the region. We've already seen Chile very likely switching to a more right-wing, more market-friendly administration this year. We've seen a shift in Argentina of course in the last two years, to a more market-friendly administration, and that's starting to pay dividends in investment returns in Argentina. Next year, we'll have elections in Colombia, as well as Brazil. I will pass over to Gustavo perhaps for a comment on Brazilian politics, being a native Brazilian. But that can also underline really strong returns both in terms of risk premiums compressing, as economic policy becomes more market-friendly and in terms of investment flows coming back to the region. 

So, beyond LatAm, I think North Asia is another space which is very interesting and has performed well this year. Of all the regions in EM, North Asia is probably the most levered to the AI trade, with some of the best and largest semiconductor manufacturers in the world being North Asian, TSMC for example, and SK Hynix in Korea. And we think that this trade can continue performing next year as demand for semiconductors remains insatiable and prices for semiconductors also remains very high. So, we think that those two regions can really perform. 

And as Gus has also mentioned, Eastern Europe is another region where we see value centred around the fact that they're going to benefit a lot from German and EU-wide investment in infrastructure and defence over the next few years.

Gustavo Medeiros: Just to add very briefly, obviously, the AI theme, massive investment coming through the region. Think about massive demand for metals. Think about Latin America benefits from that. Countries like South Africa, Indonesia, benefiting from that as well. So, there is an ongoing theme as well going across, but the themes that are important for this region specifically are exactly what Ben mentioned. 

And in Asia, I'll add that China’s Renminbi has been strengthening in 2025 against a very strong consensus for it to weaken. The Japanese yen still has been weakening on the back of people expecting the monetary and fiscal policy to be expansionary. I don't see how we can actually get that, if the government turns the fiscal spigots up, I think that the monetary policy is going to be tighter, not looser. And loose fiscal-tight monetary policy is a recipe for a currency to strengthen. The Japanese yen is already trading very far away from its fair value, vis-a-vis interest rate differentials, vis-a-vis a number of other factors. So, I do think that over time, in 2026 is quite possible, if not very, very likely, that we're going to have a moment of reckoning on the Japanese yen on the strengthening side. And if that happens, Asian FX can be a really good place to be as well, and that should support returns in local currency, bonds, and equities.

Stephen Rudman: Thank you, both. Okay, we're at our final topic. Gus, I'll charge you with this one. Obviously, we don't want to look too subjective. So, the goal here is to outline some things that do keep us up at night, our concerns that though the probability may not be high, we are constantly thinking about. If you can take it from that, right into a little summary, that'd be lovely, and then, we can do some Q&A.

Gustavo Medeiros: Absolutely. Thank you also. The first risk obviously is if we get upside inflation surprises both in the US and in other countries, and the Fed doesn't cut after December and we get a repricing on expectations, that would be obviously putting the Dollar higher before it goes lower again. That would put a spanner in the works of a number of like these topics and themes that we discussed and mentioned. 

So, the no lending scenario where we have tightening of global financial conditions and that could be complicated. We have a relatively high confidence that that's not going to happen simply because of how the trends have been in place, but we're monitoring very, very, closely. 

The second thing that can go wrong and one we have to be very humble about, and we're first to say that we're monitoring very, very closely, is that AI could be inflationary before it's deflationary in 2026. If we have a massive boom on demand for energy and commodities and energy shortages already first half of 2026, that'll obviously be inflationary overall, and therefore, we go back to point number one. So, that could be actually a key factor, driving higher inflationary pressure than we expect. 

The reason why we're going with disinflation before inflation is that when we listen to the company results of the companies that are adopting this technology, they're not mentioning any bottlenecks in energy, any bottlenecks in metals availability, any bottleneck in capital, and therefore, but on the other hand, they are firing people and getting higher earnings. So, productivity gains are increasing on the back of the labour market. 

Therefore, our sequencing is what we've been seeing over the last couple of quarters now, we're seeing this broadening to other sectors like warehouses, like small cap businesses, all giving signs when you do an overlay between company results with macro signals that they're all adopting more AI in a disinflationary fashion. But if that theme is wrong, then obviously, that could change the way we see 2026. 

The third one is if the US or the global economy slows down instead of accelerating or instead of keeping more and more robust, I'm not sure we're pricing in a massive acceleration, but we're pricing in a resilient economy which accelerates at the margin from here. And if we get a slowdown despite the tax incentives for capex and R&D in the US, and despite this massive infrastructure spending in Germany, despite the ongoing, which would be piecemeal, but ongoing, measures to support the economy in China, then obviously, we should see lower yields, but we should see wider credit spreads. That would be an environment where asset prices typically are not doing very, very well. Be that, in any case, even when we're factoring these scenarios, a hard-ish landing or a softer global economy than we expect, would most likely need policymakers to cut policy rates more aggressively. That would still give local currency bonds a pretty good risk-adjusted returns and better returns potentially than a hard currency debt, which is pretty rare for this point of the cycle. Anything to add, Ben?

Ben Underhill: No, only that when we're talking about AI being deflationary primarily by the jobs market next year, I think it's just important to put that in the context of the very weak US jobs market, which we currently have. So, if we had this AI adoption trend playing out on top of a strong jobs market, we wouldn't necessarily make the call that it's going to be a big enough lever next year to be deflationary. But the fact is that job losses from AI or slower hiring because of AI is being overlaid on top of what is already a very weak jobs market and particularly weak in cyclical sectors as you'd expect after such a long period of restricted monetary policy. And that's also an important element when we think about the outlook for the Dollar next year. 

Because when we think about what could put our thesis of continuation of the weak Dollar trend into 2026 at risk, the primary risk would be an acceleration of US growth and a compression of the EM/DM growth differential as a result of that. But with so many of the areas of the US economy in this kind of rolling recession environment that we've seen over the last couple of years, because of high rates, we don't see a very high likelihood of a reacceleration of US growth without rates coming down. And with rates coming down, particularly as other central banks around the world, particularly the EU and the Bank of Japan probably potentially looking like they're on a hiking bias as the Fed is on a cutting bias, we think that the bar for the dollar to re-accelerate in that environment is quite high.

Stephen Rudman: Excellent both. I do have two questions. Gus, will give you this one, because Ben addressed it a little bit. It's again, around Brazil and the Bolsonaro news last week. But more broadly, the question states, thoughts on impact, and again, Ben, I know you addressed it, but as Gus is the native Brazilian, we'll take his point of view as well.

Gustavo Medeiros: Look, I think that Brazilian asset prices were not pricing in a significant number of expectations around the October/November 2026 elections yet for a simple reason. If you look at Brazilian stocks, performance has not been very different than a number of its peers. Brazilian rates performance, again, not being very different than what you'd expect, and Brazilian currency not being very different from a number of its peers including South Africa, a lot of other Latin American countries, etc. 

But we're in the one year before the election now, so the markets are starting to pay more attention to that. But the former president, Jair Bolsonaro, the story is a bit long. Former President Jair Bolsonaro is in jail. He's trying to get out of jail, and ideally, which is I think almost virtually impossible, to get his political rights reinstated. There was some expectation until last Friday that Bolsonaro would appoint his former infrastructure minister of infrastructure and the current governor of the Sao Paulo state, which is a very competent market-friendly guy, very reformist politician, Tarcisio de Freitas, to be the frontrunner and potentially, with the support of Bolsonaro, defeating Lula, and then once in power, pardoning Bolsonaro. 

Now, it turns out that Bolsonaro is actually trying to get out of the situation earlier. Last Friday he agreed to support publicly his eldest son, Flavio Bolsonaro, a senator in Brazil, to be the main candidate. The issue is that Flavio Bolsonaro’s rejection rate is very high. Anybody with a Bolsonaro surname, their rejection rate is quite high. So, Flavio is the reason why we had a knee-jerk reaction in Brazilian asset prices, is that the market priced in a more complicated picture where for Bolsonaro comes to run, the right is not going to unite around one single name, such as Tarcisio, and instead we could see a more divided race and a risk of Lula going to the second round with a Bolsonaro in which case, the odds of Lula getting re-elected increase. And that's why we had this knee-jerk reaction. 

Now, the asset prices asymmetry there's going to be a very different response on asset prices if Lula wins, vis-a-vis if the centre-right wins, particularly if it's not one of the Bolsonaro family. The market was pricing until last Friday, roughly 300 basis points of cuts over the next 12 months by the central bank. And the market was not pricing in any cuts for 2027. If there is a transition of power to the centre-right, to somebody like Tarcisio, we're probably looking at Selic rates at 9% towards the end of 2027. So, the one year, one year would go from 12 to 9%.

If Lula wins, then policy rates could go back towards, I don't know, 13% or from 12-something. Therefore, that would give a very different return potential for equities as well, because you can imagine that with these higher or lower risk premium, asset prices would be cheaper or more expensive. So, we're starting to see the beginning of the drama there, as Ben pointed out. 

I think that the main most important factor to Latin America is very simple. We've seen a transition of power in a number of countries, including Argentina, Bolivia. A couple of months ago, we had the midterm elections being won by Milei with a much higher result than people expected. Kast is going in Chile, if I'm not mistaken, within the next week, to the second round with a very large advantage over the far-left candidate. It's very likely that Colombia and Peru will also get far-right or centre-right market-friendly candidates elected. There is a major theme which is going to be, which is very important in Latin America politics at the moment, which is security, which is unusual. 

Typically, Latin American voters are worried about cost of living, they're worried about getting jobs, they're worried about the economy. They're not really worried about security, even though security has always been a very large concern, lingering in the background across all countries. 

But this time, the number one concern is security. And that's a place where the leftist regimes have a lot of vulnerabilities, a lot of exposure, because they have been much more favourable towards human rights. And the far-right and the far-left make a mistake here. They're extreme in their visions, like in the societal visions in there. But the fact that the left tends to be much more pro-human rights, in an environment where the population is really concerned about their own security, means that they'll have headwinds behind them. So, the Brazilian election cycle is going to be long and tortuous and we're going to be updating you guys on a weekly basis about that. But I think it's just the beginning of the race. There's nothing defined. I wouldn't be surprised if there's a deal in which Tarcisio is still running with the support of the Bolsonaros. It's possible that Flavio Bolsonaro runs. But it's also possible that he doesn't go through the second round and we have a centre-right candidate that runs against Lula in the second round. It's also possible that Lula doesn't run. He is a bit older, he is much frailer. He himself is mentioning that. So, the uncertainty is relative but is much, much higher in this political cycle in Brazil specifically. We could do a webinar about Brazil probably, but hopefully not now.

Stephen Rudman: Thank you. I know you cover this on a weekly basis in the weekly research. So, for those of you who want to stay updated in what we're thinking, feel free to look at the weekly research. A couple of fast questions, because we're low on time, but I thought this one was worthwhile, and along the lines of LatAm here. For lower quality sovereigns, higher yielding stuff, do you think there's an opportunity for yield compression and is it actually Argentina, Ecuador or Bolivia? Maybe a couple of fast comments on what you think is possible there.

Gustavo Medeiros: Argentina has probably a lot more room for a spread compression, yes. Bolivia is a basket case. We need to see how they managed to actually implement any reforms, but it's in a very complicated spot. I think those are the preferred horses. But yes, overall, there is room for compression from these lower quality countries. 

As Ben alluded to, they've been the main countries upgraded over last two years. And if we look into their growth surprises over the last years and their monetary policy, their fiscal policies, there is potentially more room for upside. I would say one space that has not been mentioned there is Sub-Saharan Africa, countries like Nigeria, Angola, etc. A lot of room for compression there as well.

Stephen Rudman: All right, one for the same gentleman. Restructuring in Senegal, is it possible they don't restructure, and is there bad news behind that?

Gustavo Medeiros: It's very possible. If you look at debt-to-GDP levels and if you look at the debt service-to-revenue levels and the fact that they don't have market access at the moment, the International Monetary Fund (IMF) own that sustainability framework, and  should demand them to do a haircut before the IMF can reengage with Senegal. The market was very hopeful there would be no haircut. We've been very cautious on the name. We have significant underweight, if not a zero exposure to Senegal. If not zero, it is very close to zero across the funds. So I think that they should probably restructure, given the fundamentals, and given how the very large degree of the accounting fraud that got unveiled is putting them in a very fragile, very complicated position.

Ben Underhill: Just one comment as well on the spreads, just from a technical standpoint. So, this year, we saw net positive flows again for the first time in a few years back into EM debt. And from a technical perspective, EM spreads are likely to be supported by a continuation of that trend, which we would expect to see if our macro outlook plays out. 

Off the top of my head, I think the EM sovereign debt space in its entirety is close to USD 3trn, is that right? Which is only 10% of US Treasury debt and issuance. So, that just might give you a sense of the technical support that can come from global asset allocators, reallocating funds towards EM debt. And a similar story is the case also in EM equities, particularly countries with smaller market caps where only small reallocations away from DM assets towards these countries can have a meaningful impact on equity valuations in those spaces and boost returns.

Gustavo Medeiros: Well, we didn't say, which is perhaps worth mentioning as the last point, Steve, I don't know if you have any further question, is frontier. Both frontier equities and debt are a pretty good place, more room for spread compression, structural reforms, positive fundamentals, inflows would lead to a very large markup. And those are markets that have more room, more upside both in the equity and the debt space as well.

Stephen Rudman: Thank you for adding that. As we've hit time, I do want to say thank you both Gustavo and Ben. Brilliant. Covered a lot of stuff. I would like to thank everybody for attending. We recognise, not only is it the holiday season, but obviously, it's very busy as we come to year end. So, we appreciate the time and the effort. 

Couple of notes here. One, I know there are some additional questions, as I said, I promise we will get to them and we will respond. They're all good questions. We aren't cherry-picking them, but we probably could go for another hour on them, and that's not going to happen. All right. Next, we will be sending out  a follow up. If you have not already seen the actual written 2026 outlook, which is a full and slightly heavy 33-page outlook written by both Gus and Ben, for those who are willing to do that, you'll get that. 

But additionally, they are completing a summary, which two or three pages for a quickie overview, which I think will, or should very much reflect what you heard today. So, again, automatically, you will be receiving both those items, they will be on the website as well. 

If you want to share it with somebody, these are approved to be shared with non-investment professionals. They can be sent to clients and others. So, again, we wish all, on behalf of all my colleagues, London, New York, Singapore, around the world in emerging markets, a wonderful holiday season for all. Thank you for your efforts and your trust over the last 30-some odd years and more importantly, in 2025. And we wish you all the very best for 2026. Thanks, all. Have a great day. 

Gustavo Medeiros: Thank you.