BofA turns more constructive on EM: rates offer the clearest opportunity, while FX and external debt require selectivity
AI summary card
BofA turns more constructive on EM: rates offer the clearest opportunity, while FX and external debt require selectivity
The report believes the Iran-related conflict will still bring high volatility and energy risk, but emerging markets have upside over the next few months, with investment opportunities concentrated in receiving rates, selected FX, and sovereign external debt.
- The report shifts from a previously negative view on EM to a cautiously constructive stance, because the U.S. appears close to achieving its war objectives and Iran's ability and incentive to keep the Strait closed for a prolonged period are constrained by geopolitics, energy demand, and pressure from global alliances.
- Rates are seen as the best opportunity: the market may have priced in too many rate hikes, and rates linked to BRL, COP, CZK, KRW, MXN, and PEN are viewed as mispriced.
- FX opportunities are fewer and more differentiated: the report favors BRL, NGN, CNH, and HUF, while seeing KRW, ZAR, and other high-beta currencies with greater energy-import exposure as more effective hedges.
- In Asia, BoK is expected to keep the policy rate unchanged at 2.5% at its April meeting; Korea's energy shock has limited impact on March CPI, but inflation in 2Q/3Q could rise above 3%.
- In Hungary, if Tisza wins and advances an euroization strategy, fiscal credibility, risk premia, and the rating outlook could improve; REPHUN still does not fully reflect this theme.
- In Latin America, Brazil's 2026 GDP, inflation, and Selic forecasts were raised because of higher oil prices; in Peru, Soberanos 2037 are preferred after FX hedging; Argentina external debt remains Overweight.
Report interpretation
Overview
This is a BofA Securities Global Emerging Markets Weekly covering global EM macro, rates, FX, external debt, and regional strategy. The report's core view is that the negative stance on EM since the start of the war is changing, because the U.S. appears close to achieving its war objectives and Iran's ability and incentives to keep the Strait closed for a prolonged period are limited. Although the path ahead will remain bumpy, market volatility may stay elevated, and energy shortages and supply-chain damage may also lift inflation and growth risks, the report believes EM has upside over the coming months.
Core views
The core views are: first, rates offer the most opportunities, and the report believes many markets have priced in too much rate-hike or tightening risk; in a de-escalation or growth-stressed scenario, central banks are more likely to wait and watch for second-round effects, making receiving rates attractive. Second, FX opportunities are more limited, because energy imports weaken trade balances, but BRL, NGN, CNH, and HUF remain attractive due to carry, valuation, or EU funding themes. Third, on external debt, the report continues to favor Argentine external debt and re-enters ARGENT 35s, while also re-entering Sri Lanka 38s in Asia and Ukraine 35As in EEMEA. Fourth, regionally, BoK is expected to stay on hold, Hungary's euroization theme is underestimated, Brazil's oil shock changes the path for growth, inflation, and rates, and Peru Soberanos 2037 look more attractive after a sharp selloff.
Analysis framework
The report uses a combination of global macro scenario analysis and regional asset selection: it first assesses the macro constraints from the Iran conflict, Strait passage, energy prices, and global growth, then maps them into EM rates, FX, and external debt; it then discusses monetary policy, capital flows, fiscal trajectories, rating triggers, and specific trades across Asia, EEMEA, and Latin America. In the Hungary section, the report also draws on credit spread behavior seen in the euroization processes of Bulgaria and Croatia; in the Brazil section, it evaluates GDP, CPI, Selic, fiscal, and external account outcomes under baseline, de-escalation, and escalation oil-price scenarios.
Methodology notes
Path impact of an energy shock on growth, inflation, rates, and external accounts
The report treats the Iran conflict and the oil-price path as core exogenous variables, comparing central-bank responses, second-round inflation effects, growth constraints, and asset-price opportunities under war-end, de-escalation, and escalation scenarios.
Finding better risk-return expressions across rates, FX, and external debt
The report believes the clearest opportunities are in rates; FX is more constrained by energy imports and trade-balance pressure; and external debt opportunities are centered on sovereign credit such as Argentina, Peru, Ukraine, and Sri Lanka.
Inferring REPHUN opportunity from rating and OAS changes around euroization in Bulgaria and Croatia
The report observes that BGARIA and CROATI had narrowed relative to rating peers before formal euroization signals, while REPHUN is still about 13-15bp wider than BBB peers, suggesting the market has not fully priced in Hungary's fiscal improvement and euroization path.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- EM ratesThe most preferred cross-asset opportunity in the report
- Strengths
- The market may have priced in too many rate hikes; in a de-escalation scenario central banks can remain patient, while in an escalation scenario growth risks also limit further tightening room.
- Weaknesses
- The energy shock may cause second-round inflation effects, and short-term volatility and risk premia remain high.
- Comparison
- Compared with FX, rates offer a clearer opportunity; BRL, COP, CZK, KRW, MXN, and PEN are singled out as more clearly mispriced.
- Risks
- Persistent high oil prices, unanchored inflation expectations, hawkish central banks, and a change in the Fed path.
- EM FXSelective opportunities and hedge tools coexist
- Strengths
- BRL and NGN have carry support, CNH is attractive on valuation, and HUF is supported by EU funds and the euroization theme.
- Weaknesses
- Energy imports weaken trade balances, leaving FX under more persistent pressure than rates.
- Comparison
- The report sees fewer FX buying opportunities than rates, while KRW and ZAR are more suitable as high-beta risk hedges.
- Risks
- Rising energy prices, deterioration in the current account, a drop in global risk appetite, and a stronger U.S. dollar.
- EM external debtSelective sovereign external debt opportunities
- Strengths
- The report re-enters ARGENT 35s, Sri Lanka 38s, and Ukraine 35As, and maintains an Overweight view on Argentine external debt.
- Weaknesses
- External debt is highly sensitive to global risk premia, IMF progress, ratings, and geopolitical conflict.
- Comparison
- Compared with broad EM risk, the report prefers sovereign credits with clear catalysts or room for relative-value repair.
- Risks
- Escalation of the Iran conflict, tighter global funding conditions, rating downgrades, and policy execution failure.
- Korea rates / KRWBoK stays on hold, but inflation and FX pressure are rising
- Strengths
- BoK is expected to keep the policy rate unchanged at 2.5% in April; the March CPI impact is limited by fuel-price caps.
- Weaknesses
- High Brent prices could push 2Q/3Q inflation above 3%, and KRW has already weakened significantly amid market risk-off behavior.
- Comparison
- Given its energy-import exposure and high-beta characteristics, Korea looks more like a risk hedge than a simple long.
- Risks
- Inflation pass-through stronger than expected, changes in the stance of the new BoK Governor, further KRW depreciation, and equity outflows.
- Hungary / REPHUN / HGB 2029s / HUFThe euroization and fiscal-consolidation theme is underestimated
- Strengths
- If Tisza wins and includes euroization in its medium-term strategy, it could improve the policy anchor, fiscal credibility, capital inflows, and the rating outlook.
- Weaknesses
- Short-term fiscal consolidation capacity is limited, and the details of election promises and spending plans remain unclear.
- Comparison
- The euroization experiences of BGARIA and CROATI show that credible fiscal improvement often narrows spreads before a formal signal; REPHUN is still wider than BBB peers.
- Risks
- Tisza fails to win or form a government, EU funds remain constrained by rule-of-law issues, fiscal discipline is insufficient, and energy-cost shocks.
- Brazil rates / BRLHigher oil prices shift the macro path toward higher inflation and slower cuts
- Strengths
- Export income and energy investment improve the outlook, lifting the 2026 GDP forecast to 2.3%, and BRL is supported by carry and trade terms.
- Weaknesses
- The IPCA forecast is raised to 5.0%, the year-end Selic forecast rises to 13.25%, and the pace of cuts slows.
- Comparison
- In a de-escalation scenario, BCB could cut faster; in an escalation scenario, it may stop cutting and keep Selic at 14.50%.
- Risks
- Sustained high oil prices, second-round inflation effects, fiscal space consumed by fuel subsidies, and slower growth.
- Peru Soberanos 2037The report prefers buying Soberanos 2037 after FX hedging
- Strengths
- The recent selloff is seen as excessive relative to fundamentals, BCRP is unlikely to hike, and election risk appears limited.
- Weaknesses
- Still sensitive to global risk sentiment and local rate volatility.
- Comparison
- The report recommends closing short PERU 51s versus long URUGUA 55s and shifting to the more direct Soberanos 2037 opportunity.
- Risks
- Higher global rates, spillover from the energy shock, re-pricing of election risk, and deteriorating liquidity.
- Argentina external debt / ARGENT 35sMaintained as Overweight and re-entered via ARGENT 35s
- Strengths
- If global tensions de-escalate, reserve accumulation, rating upgrades, and IMF reviews could restore the positive feedback loop between fundamentals and market access.
- Weaknesses
- Argentine external debt is highly sensitive to external risk premia and policy credibility.
- Comparison
- Within Latin American external debt, the report views Argentina as a high-beta opportunity with strong catalysts.
- Risks
- Escalation of the Iran conflict, weaker-than-expected reserve accumulation, setbacks in the IMF process, and political and execution risk.
Key data
- Cumulative EM Asia ex-China flowsUSD1.18bnAs of the end of February 2026, combined bond and equity flows were positive, constructive at the start of the year but fairly muted.
- Cumulative EM Asia ex-China equity outflowsUSD3.32bnAs of the end of February 2026, equities saw cumulative outflows, with South Korean equities particularly weak in the month.
- BoK policy rate expectation2.5%The Bank of Korea is expected to leave rates unchanged at its April meeting.
- Korean inflation outlookAbove 3% in 2Q/3QUnder a baseline Brent scenario near USD100/bbl, headline inflation in Korea is expected to rise above 3% in 2Q/3Q.
- Brazil 2026 GDP forecast2.3%Raised from 2.0%, supported by export income, energy investment, and carry dynamics.
- Brazil 2026 IPCA forecast5.0%Raised from 4.0%, reflecting the first-round effect of energy and second-round pressure from food and other items.
- Brazil year-end 2026 Selic forecast13.25%Raised from 11.75%, as higher inflation and greater uncertainty could slow the pace of cuts.
- Hungary 2026E budget deficit5.5%-6% / GDP range, with a report baseline of about 5.7%The report believes that if the external backdrop is benign and fiscal consolidation is credible, the deficit could fall to 3% of GDP by 2029.
- Hungary public debt pathAbove 70% of GDP in 2026E, trending down toward 60% of GDPEuroization and improved fiscal credibility could support lower risk premia and a better rating outlook.
- REPHUN relative valuationAbout 13-15bp wider than BBB peersThe report believes the market has not fully priced Hungary's euroization and fiscal-improvement theme.
Impact & implications
For portfolios, the implication is that emerging markets are no longer merely a defensive avoidance area, but risk needs to be managed through more precise asset selection and hedging. The report prefers to express a constructive view through rates, avoid broadly long FX and instead select currencies with carry, valuation, or flow support, and choose sovereign debt with fundamental improvement, rating catalysts, or post-selloff value. Energy prices and the Iran conflict are the common risk factor across all assets, so portfolios need to maintain extra risk premia and hedges in high-beta currencies.
Risks
- An escalation of the Iran conflict or disruption to Strait passage could cause a nonlinear worsening of the energy shortage.
- Brent remaining elevated for a prolonged period could lift inflation and fiscal costs while suppressing growth.
- Energy prices could create second-round inflation effects through food, transport, and supply chains, forcing central banks to turn more hawkish.
- Global market volatility could remain high, with sudden outflows from EM bond and equity markets.
- Countries with high fiscal deficits and high inflation are especially vulnerable in a downside scenario.
- Hungary's euroization and fiscal consolidation depend on election results, EU funds, budget discipline, and the external environment.
- External debt trades in Argentina, Peru, Ukraine, Sri Lanka, and similar markets carry high sovereign credit, liquidity, and policy risk.
- The disclosed trading and investment strategies are high risk and are not suitable for all investors.
What to watch
- Whether the conflict objectives of the U.S. and Iran, Strait passage, and global energy supply continue to de-escalate.
- Whether Brent oil stays in the USD90s range predicted by the report's energy team or moves back toward USD100/bbl.
- BoK's April meeting comments on the energy shock, KRW, and the medium-term inflation path.
- Whether new BoK Governor Shin Hyun-Song continues to downplay the impact of KRW depreciation.
- EM Asia ex-China bond and equity flows, especially weekly changes in Korea, Taiwan, India, and Thailand.
- Hungary's April 12 election result, whether Tisza can form a government, and whether budget and medium-term fiscal strategy send credible signals by summer or before October.
- Whether REPHUN's OAS versus BBB peers begins to narrow and whether the rating outlook improves before around 2028.
- Whether Brazil's GDP, IPCA, Selic, fiscal, and current-account forecasts continue to be revised under the oil-price scenario.
- Whether Peru's BCRP keeps rates unchanged and whether the Soberanos 2037 selloff reverses.
- Argentina's reserve accumulation, rating upgrade, IMF review, and the performance of ARGENT 35s.
- Key data next week: China GDP, Mexico and Brazil activity data, and Poland CPI.
- CTA positioning: EM rates shifting from carry to neutral, Asia FX bearish, and EEMEA and LatAm FX diverging.