Global EM Sovereign Credit Fixed Income Mid-Year Outlook: Tight Club

Research evidence excerpt

Global EM Sovereign Credit Fixed Income Mid-Year Outlook: Tight Club

Global InsightM

EM Sovereign Credit Outlook

The five key pillars of a supportive EM outlook still hold: In our 2026 outlook we laid

out a bullish outlook for EM sovereign credit driven by five key supports in particular. Four

months into the year, we think all still hold with the exception of global growth downside

revisions affecting the growth outlook.

1) Continued strong global risk appetite -> forecasts remain bullish: Morgan Stanley

still anticipates broader risk trading well in 2026 and into 2027, including US equities

significantly higher (the S&P 500 ending 2H27 at 8,300), US credit spreads remaining

tight (US IG ending 2H27 at 90bp, HY at 275bp) and the dollar to weaken.

Exhibit 1: Broader Morgan Stanley forecasts suggest a still positive set-up for risk into 2027

Source: Bloomberg, MSCI, Morgan Stanley Research forecasts; Note: Returns are total returns, except for credit, where we forecast excess returns versus government bonds.

Commodity returns are calculated relative to futures to account for carry. Brent spot is shown as front-month contract, while returns are calculated on the Jun-27 contract. Volatility

is 10y realized vol. All currency returns are shown as XXXUSD return. *Currency forecasts shown for USDXXX..

2) Better EM growth and reform outlook -> some downside revision yet EM holds up

versus DM medium term: The impact of the Middle Eastern oil shock has been more

negative for EM than the US ( Exhibit 3 ), with the rebound in relative growth differentials

for 2026 falling from 1.42% to 0.68% for 2026 in the recent IMF outlook, thus

interrupting the path of relative EM outperformance ( Exhibit 2 ). This was clearly not part

of our outlook and is a negative.