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Witold Bahrke
Senior Macro and Allocation Strategist
A short Q4 2025 outlook
§ MACRO: Taking stock on three key themes for 2025
Peak US exceptionalism: Pausing. Reduced policy uncertainty, resilient growth, reduced fiscal concerns due to tariff revenues and an AI investment boom means US growth estimates are being lifted. Chinese momentum disappoints as fiscal stimulus remains measured → EM-DM (ex. US) growth gap should widen, EM – US more sideways (RHS).
Peak policy uncertainty: On track. Trade uncertainty is high, but falling. US effective tariff rate most likely settles below its recession threshold. Trump’s pressure on Fed should be about to peak as he’s underperforming on inflation in the eyes of voters (no.1 concern).
Peak growth pessimism: For now, mostly a DM story as China’s stimulus cycle slows. US recession probability falls as monetary conditions ease, oil price is low and labour lags.
Two-sided RISKS: Overheating/stagflation & recessionary reflexivity (US job market).
§ MARKETS: Solid 12M returns - shifting down into year-end
Don’t extrapolate: Monetary easing and peak policy uncertainty supports EMD, but growth rebalancing takes a breather → positive, but lower EMD returns towards year-end.
Rethink the narrative (I): Tactically moving hard currency to overweight form neutral as support for EM FX from peak US exceptionalism fades and USD weakness is consensus.
Rethink the narrative (II): Structural shifts (higher inflation, level-shift higher in geopolitical uncertainty, higher fiscal leverage) create a more uncertain investment environment. These shifts are driven out of DM, not EM → EMD performed because of elevated uncertainty, not despite of it. Longer-term, these shifts should benefit local currency debt, in particular.
It’s the supply side, stupid: Normally, gauging the business cycle is all about the demand side – not so much this time around → assessing the business cycle is much more two-dimensional than usual – uncertainties abound!
Mid-cycle upturn: Rather than extrapolating US labour market weakness into “recessionary reflexivity”, the latter might be as weak as it gets (LHS) as the economy exits a mid-cycle soft-patch. This rhymes with a stabilization of the outputgap (RHS).
Implications: Growth concerns are overblown…and monetary easing momentum is approaching a peak.
A little bit of US exceptionalism repeating: An AI investment boom has contributed significantly to H1 growth (RHS), US consumers are so far unimpressed by tariffs and US GDP estimates are being revised higher (RHS).
Atlanta Fed’s Nowcast model indicates 3-4% GDP growth (AR**).
**) AR: Annual rate
EM inflation continues to drift lower, while DM inflation is stagnating (EA) and accelerating in the US (LHS).
Disruptive divergence: Re-flation in the US, deflation in China (RHS)
→ As long as China is in deflation, it will be difficult to get consumption going.
→ China’s size relative to the US economy in current USD/market exchange rate terms (63%) is the same as it was in 2015.
Amid US labour market weakness, Fed’s not done with its “insurance cuts”.
However, the market seems to have priced too many cuts. Current pricing is more reflective of a recessionary backdrop (LHS), which we don’t see. Monetary conditions are easing (RHS), but the pace of easing (impulse) is peaking.
Fed independence under threat: Acc. to YouGov Sep. survey*, inflation is the single biggest issue for US voters. Trump scores the poorest on inflation ahead of Mid-terms → beyond pure rhetoric we believe, White House pressure on the Fed should subside in 2026.
*) See link here.
In April, our contrarian GE Risk Index triggered a positive signal for risk assets and for credit risk, in particular (peak pessimism, LHS).
Tactical signals point to limited risk of spread widening overshadowing carry as the main return driver for hard currency debt.
“Peak US exceptionalism” pausing, implied vol is historically low (RHS) → tactical downside risks to EM FX.
Rethink the narrative (I): While we believe local currency EMD will outperform longer term, we prefer hard currency EMD into year-end.
What to watch out for: Should the GE Risk Index surpass +2 std. dev., some spread widening in subsequent months has to be expected.
Rethink the narrative (II): Structural regime shifts (higher inflation, higher geopolitical uncertainty, fiscal largesse) are EM- driven
→ Impacting DM vol more than EM vol (LHS), improving the relative risk/reward of EM debt.
Upside potential: In particular, we expected EM Local Currency Debt to move north-west in the RHS diagram on the coming years.
Prepared by Global Evolution as of Sep. 29, 2025. Performance is calculated in USD, gross of fees. Performance is calculated in USD, gross of fees. Past performance is not indicative of future results. Strategy inception: Dec. 15, 2010. Please see the “GIPS Performance & Disclosure” for Frontier Markets Composite at the end of this document. . The data above is supplemental to the data contained therein and information on fees are present. All composite performance presented after December 31, 2024 is subject to final annual revision and re-calculation where the result will be adjusted due to changes in management fees, performance fee, custody fees and administration fees or non-material errors in pricing. Please see definitions page at the end of this document for clarification of indices.
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