Key Takeaways:

• Low-debt EMs with orthodox central banks are benefiting, while high-debt DMs face fiscal and political strains.
• EM governments are popular and disciplined, contrasting with weak and unpopular DM leadership.
• A steadily strengthening CNY is a key, overlooked driver of EM currency resilience.

The VanEck Emerging Markets Bond ETF^† was up 1.70% in September, compared to 1.59% for its benchmark, the 50% J.P. Morgan Government Bond Index - Emerging Markets Global Diversified (GBI-EM) and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). Year to date, the ETF is up 15.41%, compared to 13.04% for its benchmark, and 8.12% and 6.96% for the Global Agg and 10-year Treasuries, respectively. Argentina was a big mover this month (and an outperformer for the ETF). We touch on it inside, though we caution that there is a significant global oversupply of opinions on Argentina. Here’s ours: we didn’t like Argentina because policy was way ahead of politics and there was a consensus overweight/bullish view in markets and among cab drivers globally. Then politics arose, bonds puked, and there was a chance of a fairly fast and easy bridge loan from the US (which then happened). So, when it crashed, we got bullish. It’s a trade, we are still in a heavily game-theoretic stage. We remain very bullish on local currency, while somewhat cautious on USD duration especially with low spreads. The ETF has around 55.3% in curated local currency, the rest in mostly higher-yielding USD bonds. Carry is 6.4%, yield to worst (YTW) is 8.1%, and duration is 5.3. The maximum for local is 60% and our bias remains to be close to the maximum.

Average Annual Total Returns^* (%) (In USD)

The big wheel turning remains “fiscal dominance”, in which low-indebted EMs with inflation-focused central banks win, and high-indebted DMs with arguably co-opted central banks lose. We got reminders of the bad – UK financing worries, a EU that looks not to be seizing the moment to issue mutualized debt when the market wants it, a new PM in France with immediate protests over fiscal policy…sigh. EM gave us more reminders of the good. Mexico’s first budget under newly elected President Sheinbaum met market expectations of orthodoxy. Indonesia re-committed to its fiscal targets after a bout of political turmoil that saw its finance minister leave. (Now, on Indonesia, we must say that we have low confidence in this commitment, but our point is that the government rushed to reassure on orthodoxy; whether they are serious is a separate question.) South Africa is arguably in a goldilocks situation, with its always-excellent monetary policy now complemented by improved fiscal outcomes. China is chugging along smoothly, with the market hopefully realizing that weak growth outcomes will be met with fiscal stimulus (which will be reduced if strong growth outcomes materialize). And we have deepening reform in Ecuador under its IMF program, and surprising positive policy tilts in Zambia, just to mention some of the off-the-beaten-path names.

“Fiscal dominance” also happens to map to social and political risk. A classic outcome is higher inflation, which reduces the real value of debt at the expense of social and political peace, as well as attempts to downplay inflation in nominal GDP narratives. A cursory look at DM headlines tells you we are at this stage. EM politics, on the other hand, are generally characterized by strength, popularity, and economic orthodoxy. Just look at Exhibit 1, which shows government popularity (defined as “approval” and using data sources chosen by Perplexity). We always like to remind investors that it is hard (and getting harder) to find relevant political parties in EMs that can get away with heterodoxy – voters aren’t as susceptible to promises of fiscal profligacy or harnessing central banks to gin up growth. Mexico’s supposedly left-wing government is economically orthodox and generated higher real incomes for Mexicans, for example – that is a typical and arguably growing formula inside EMs. Roughly half of consumption in many of our countries is food and energy, so voters have disciplined politicians over decades.

Exhibit 1 – EMs Have Popular (and Orthodox) Governments, DMs Have Unpopular and Flailing Governments

Government Popularity

Source: VanEck, Perplexity; data as of September 2025.

If “fiscal dominance” is the big wheel, CNY remains the driving wheel where actual asset-price stuff starts happening…and it keeps strengthening steadily. This remains one of the most important dynamics for all markets and remains incredibly overlooked. EMs trade more with China than with the US, so this is a huge tailwind to EM currencies (see Exhibit 2). And remember the start of the year or even last month? The consensus view was that tariffs would destroy EM currencies. The opposite has happened. We’ve written extensively on this, including our piece “The Curiously Unpopular Case for RMB/CNY Appreciation”. Now, as we said in the piece, CNY itself is not the way to express this view. It will be tightly managed and the appreciation will be like watching paint dry. Lucky for us we can invest in bonds/currencies that are allowed to move more freely, see below for the big names. We should also point out that the ETF has no exposure to India local currency, which performed poorly in 2025, as we see it as broadly “not ready for primetime”. We are also cautious/underweight on Indonesia local, also a loser this year.

Exhibit 2 – EM Currencies Keep Rallying; Every Possible Cause Cited Other Than CNY

Source: Bloomberg. Data as of September 2025.

A look at Argentina. The ratio of the number of opinions on Argentina relative to its importance is astronomical. For decades this has been the case. From cab drivers to heads of state – I’m always getting asked about trivial Argentina and never about Indonesia, Brazil, South Africa, or Nigeria. It’s incredible. Our opinion is actually pretty simple, and we’re also intimating that the world doesn’t need more opinions on Argentina…but here’s ours.

We didn’t like Argentina. Policy was way ahead of politics. Then it blew up in September and bond prices crashed. And, there was a chance of a fairly fast and easy bridge loan from the US. And, the market was consensus overweight, even the cab drivers. So, when it crashed, we got bullish. It’s a trade, we are still in a heavily game-theoretic stage. But, the government can probably get through to midterm elections with protecting reserves and actually buying back short-dated USD debt (which we now own). We’ll see what we think at that next decision node, the midterm elections.

Exposure Types and Significant Changes

The changes to our top positions are summarized below. Our largest positions in September were South Africa, Mexico, Poland, Thailand and Malaysia:

• We increased our local currency exposure in South Africa and Poland. South Africa’s “sleeper” fiscal story is not fully appreciated by the market, but the country’s fiscal performance continues to improve, and the latest move – considering a formal fiscal rule – would be a major structural breakthrough. In terms of our investment process, this has strengthened South Africa’s policy test score. Poland’s fiscal situation looks more concerning, but this is unlikely to affect net bond issuance and slow fiscal consolidation (which in part reflects less inflationary defense spending) is mostly priced in. Poland’s central bank remains credible, and the currency is a proxy for the Europe’s revival theme, which improves the technical test score for the country.
• We also increased our hard currency sovereign exposure in Argentina and the Republic of Congo. The level of political noise in Argentina will remain elevated in the run up to the mid-term elections, but the U.S. decision to provide a large-scale support package (which came after a major selloff) is likely to be a game-changer for the post-election period, strengthening the policy test score for the country. Congo’s multi-billion dollar deal with China to boost oil production had a positive impact on the country’s economic and policy test scores.
• Finally, we increased our local currency exposure in Mexico and Chile. Mexico is a major winner in Trade War 2.0, with supportive domestic backdrop (gradual fiscal consolidation, disinflation, and credible rate cuts being the most relevant for local bonds). The global commodity/copper price backdrop remains beneficial for the Chilean currency, the central bank might deliver another rate cut, and the presidential election outcome is not expected to derail Chile’s orthodox policy framework. In terms of our investment process, this improves the technical and policy test scores for the country.
• We reduced our local currency exposure in Indonesia on the back of the constant flow of negative fiscal news, which reflect the government’s increasingly pro-growth policy stance. An additional structural complication is an attempt to expand the central bank’s mandate. Both factors worsened the country’s policy test score. Further, Indonesia’s economy will be negatively affected by the Grasberg mine incident – it lowered the economic test score for the country.
• We also reduced our local currency exposure and hard currency corporate exposure in Brazil. The latter reflected corporate fraud allegations. Regarding local bonds, we took partial profits after the huge year-to-date rally, which dented the technical test score for the country. We are likely to take it back up.
• Finally, we reduced our local currency exposure in China and hard currency sovereign exposure in Bosnia and Herzegovina. Bosnia and Herzegovina is making structural progress to access the EU funds (Growth Plan for the Western Balkans), but valuations are less attractive now, so we decided to employ the funds in more compelling opportunities. We also took partial profits in China, since the anti-involution policy push is expected to lead to higher domestic prices, and hence, higher local yields, worsening the policy test score for the country.

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