In this update, we present the quarterly State of Trend report for Q4, 2025. 

Our report covers the performance of trend following systems compared with traditional investments such as the S&P/ASX 200 Total Return index, and the Australia "60/40" portfolio. Trend following provides exposure to a diverse pool of underlying instruments, and implements trading strategies systematically and without emotional biases.

Trend following outperforms Australian traditional assets

In Q4 2025, Australian traditional risk assets faced headwinds as policy uncertainty, global growth concerns and persistent inflation volatility weighed on investor sentiment. Trend following systems delivered strong positive returns, benefitting from sustained momentum in metals, international equities and selective currencies.

Key market movements in Q4 2025

• Markets wrestled easing growth signals and stubborn inflation dynamics through Q4, along with persistent geopolitical flashpoints, tariff surprises and shifting policy expectations

  • Equity markets were uneven with Asian and European indices rallying strongly, but more anemic performances from North American and Australian indices

  • Fixed income markets suggested a gradual repricing toward future easing, but the short-end of the market continued to price near term rate hikes due to persistent inflation risks

• Commodities provided the clearest and most persistent trends

  • Precious and industrial metals surged, reinforcing their role as inflation hedges amid geopolitical uncertainty

  • Energy markets were mixed. Oil prices declined on softer growth expectations, while natural gas rallied, supported by supply constraints and seasonal demand dynamics

• Trend-following strategies were well positioned, and extended gains from Q3. By capturing sustained directional moves across asset classes, systematic strategies delivered meaningful outperformance versus traditional asset classes for the period, reinforcing the diversification benefits of a rules-based approach

Featured chart - Silver

• Silver delivered one of the strongest performances across global asset markets in Q4. The move was driven by a rare convergence of investment and industrial demand, as easing financial conditions, a softer USD and persistent geopolitical uncertainty coincided with tight physical supply

• Such sharp, sustained price advances are characteristic of the environments in which trend-following strategies tend to perform well, capturing momentum that is often absent from traditional equity-centric portfolios

See the full report at our website.

We've been investing in emerging market debt (EMD) for over 30 years, with deep experience across both fast-growing frontier markets and established economies - at the corporate and sovereign level.

So, what are the opportunities, risks, innovations and trends in EMD investing today? Read our far-reaching interview with Siddharth Dahiya, Global Head of EMD, to find out.

Q: Why should investors consider emerging market debt in 2026 and what are some of the most attractive opportunities?

Emerging market debt (EMD) enters 2026 in great shape. Across the asset class, we're seeing a range of positive dynamics. Hard currency sovereigns, for example, are experiencing a wave of ratings upgrades, reversing a decade-long trend of downgrades. This shift signals improving fundamentals and growing resilience across many EM economies.

Local currency EMD also stands out. Despite some recent depreciation, the US dollar remains expensive, which means yields in EM local markets are relatively attractive. This environment offers investors the potential for both income and currency appreciation - a combination that's relatively rare in today's markets.

On the corporate side, fundamentals are robust. EM corporate balance sheets are the strongest they've been since the global financial crisis, underpinned by prudent management and favourable technical factors. Demand for EM corporate debt is currently outpacing supply, which has translated into solid returns for investors.

Frontier markets - from Ghana's gold-driven recovery to Egypt's reform progress - are also showing real promise. Many have emerged stronger from the turbulence of the pandemic. Fiscal discipline has improved, foreign exchange (FX) reserves are healthier and debt profiles are more sustainable. 

In short, EMD is benefiting from a range of positive forces across the asset class - making it a timely and well-diversified opportunity for investors.

Q: How do you expect the EMD landscape to evolve over the next 12 months?

We see the this year as a period of steady momentum rather than dramatic change. What is catching our eye is the growing interest in local currency debt, especially in frontier markets that used to fly under the radar. Investors are starting to take notice, attracted by improving fundamentals and compelling yields in these markets.

After several years of significant outflows, we are now seeing a return to net inflows - a shift that reflects renewed confidence in the asset class. We think this positive momentum will continue for the foreseeable future.

Q: Which frontier markets stand out as offering unique potential - and what are the risks?

Frontier markets present a diverse set of opportunities, each with its own idiosyncratic stories. The risks here are less about broad macro shocks and more about country-specific factors. For example, some frontier economies are heavily reliant on oil exports, making them vulnerable to price swings. 

We've already seen this year the US capture former Venezuelan president Nicolás Maduro. Venezuela has been in default since 2017 and although bonds rallied in reaction to the news, they continue to trade significantly below par. The eventual recovery value on these bonds is likely to be higher than current market prices given the potential upside from an oil linked instrument. 

There's a lot to get excited about, elsewhere. Take Ghana. Its recent restructuring was a success, while a gold boom pushed its current account into surplus and lifted FX reserves to over US$11 billion. Egypt and Nigeria are also noteworthy, with disinflationary trends and high local yields creating attractive real returns. 

So, the frontier universe offers opportunities across the board - from performing dollar and local currency credits to distressed situations with turnaround potential. The key is to understand the unique narrative and risk profile of each market.

Q: Are there thematic strategies within EMD that investors should pay attention to?

Several themes are shaping the EMD landscape. The distinction between oil exporters and importers remains important, as does the impact of global tariffs and the ongoing trend towards nearshoring. 

Geopolitical developments, such as a potential resolution to the Russia-Ukraine conflict, could be transformative. A ceasefire or peace agreement would likely trigger substantial multilateral support and investment, particularly in Ukraine. It could also influence energy prices, benefiting EM economies where energy costs have driven inflation.

Tariffs have created both winners and losers. For instance, Mexico was expected to benefit from preferential access under the USMCA trade agreement, but a lack of follow-through investment has limited those gains. India, facing high tariffs, is less affected due to its relatively closed economy and exports focused on tariff-exempt services, rather than goods.

Q: How do you balance sovereign versus corporate EMD exposure in the current environment?

We believe both sovereign and corporate EMD have important roles to play in a well-constructed portfolio. Sovereign debt offers a wider dispersion of ratings, providing access to higher-yielding opportunities, while corporate debt tends to be higher quality, with a greater proportion of investment-grade issuers.

Sovereign bonds typically have longer duration, making them more sensitive to interest rate movements. With rates expected to fall, sovereigns may outperform. Conversely, corporates can offer defensive qualities when rates are rising or volatility increases.

Investors can blend these segments, tailoring the mix to market conditions and their objectives. This diversification helps manage risk and capture opportunities across the EMD spectrum.

Q: What role does currency exposure play in EMD returns, and how do you manage FX risk?

Currency moves are a key component of the EMD narrative, especially in local markets. Last year, FX appreciation against the dollar was a significant contributor to performance. Investors can benefit from both currency gains and yield compression in local markets. If the dollar continues to weaken, local currency EMD should remain attractive.

Managing FX risk is crucial, especially for corporate issuers. We pay close attention to companies' currency exposures, preferring those with natural hedges, such as revenues and liabilities both denominated in dollars. Where natural hedges are absent, we want to see robust synthetic hedging strategies to mitigate risk. In the end, it's all about discipline and ensuring your portfolio can weather any sudden currency swings. 

Q: How do you see global monetary policy shifts - especially potential rate cuts - impacting EMD performance?

Global rate cuts are good news for EMD. Lower risk-free rates enhance the appeal of higher-yielding markets like EM, encouraging investors to seek out additional carry. When US Treasuries offer lower yields, the incentive to allocate to EMD increases, driving inflows and supporting performance.

Looser financial conditions also mean more capital is available for emerging markets, often creating a virtuous cycle of investment and growth. Additionally, rate cuts typically put downward pressure on the US dollar, which can further enhance returns for local currency EMD strategies.

Q: What catalysts could unlock value in EMD over the next year?

There are many. Country-specific reforms, successful restructurings, and geopolitical developments could all move the needle. Increased investor attention and flows are also important. Despite EM accounting for around half of global growth, it remains a small portion of most portfolios. A secular shift towards greater EM allocations could unlock significant value for investors.
 

Q: For investors considering EMD today, what allocation strategies make sense - active vs. passive, hard vs. local currency?

Active management makes the most sense. The asset class is diverse and idiosyncratic, and evidence shows active managers consistently outperform passive approaches. In such a complex market, skilled security selection, risk assessment and country analysis add meaningful value that passive exposures simply can't replicate.

The choice between hard and local currency depends on risk tolerance. Local currency offers greater potential but comes with higher volatility, while hard currency can provide defensive qualities, especially in investment-grade segments. 

The good news? All areas of EMD have something to offer this year, allowing investors to tailor allocations to their objectives and market outlook.