📝Lowering Outlook On EM Debt On 'Higher For Longer' Fed: Morgan Stanley Strategy

Lowering constructive views on EM sovereign debt as we see a rise in the likelihood of a 'higher for longer' posture from the Fed.

Many of the reasons for us being bullish on EM sovereign

credit in our year ahead outlook still hold, including the EM-DM

growth differential moving in favor of EM, global rates being

much better priced and the path for inflation still being lower.

However, to see returns higher again, both excess and total,

will likely require more time. In particular, the terminal rate

likely needs to get closer to 5.75%, which may happen once the

Fed revises its own projection higher.

We remain bullish EMFX, while we recommend clients to buy 5yr CDS for Brazil, Colombia and South Africa to position for short-term weakness.

- Morgan Stanley Strategy