All things being equal, 2026 should see a number of the new trends that dominated in 2025 deepen, according to Mike Riddell, portfolio manager of the Fidelity Strategic Bond Fund. This includes the dollar’s decline, a structural change that has only just begun to play out, making a strong case for emerging market debt in 2026.
“One of my key convictions this year has been local currency emerging market debt. With valuations at ‘crisis’ levels in many emerging market (EM) currencies and a US administration increasingly keen to cut rates and to talk down the dollar, I see a strong case for looking at emerging economies where rates are still high and there’s further scope for currency appreciation.
“As an example, central bank rates in Brazil now stand at 15 per cent, the economic outlook is solid, and inflation is around 5 per cent. Holding Brazilian sovereign bonds at these real yields feels like a no-brainer.
“On the demand side, we’ve not seen these supportive market conditions for a while and many investors are understandably still scarred from the poor performance of EM bonds over the past decade. So while the EM trade has been talked about all year, the money, in bulk, has yet to arrive. This sets the scene for 2026, where we see the possibility of much greater allocations into emerging market debt on the back of 2025’s strong returns and continued cheapness in many places.
US inflation risks
“Inflation in the US is one risk to this scenario. Markets are pricing in around four rate cuts by Q1 2027, which we struggle to reconcile with strong economic activity and easy financial conditions.
“The Federal Reserve may resist to some degree, but the Trump administration will still push for lower rates. As a result, we think the dollar move we have seen this year is the start of a much more structural decline.
“The sustained US fiscal deficit has injected lots of money into the economy, but, unlike the programmes of quantitative easing in 2009 and 2020, it is possible for this supply of money, ultimately from the ‘kindness of strangers’, to run out. In this scenario, perhaps in response to ongoing antagonistic trade policy, foreign investors may look to sell or hedge their exposure.
Rise of the euro
“Much of the US dollar move has been versus the euro, helped by the rotation earlier this year towards European companies, defence shares, and so on. But the European Central Bank (ECB) cannot easily sit on its hands and watch the single currency rise.
“By contrast, many of the major EM currencies are priced more for crisis than current realities: there is more room here to run.”
