Q&A: Investigating today’s emerging market debt opportunities

So, what are the opportunities, risks, innovations, and trends in EMD investing today? Our Global Head of EMD Siddharth Dahiya helps to provide clarity for investors by exploring what’s to come for the asset class today.

Why should investors consider EMD in 2026 and what are some of the most attractive opportunities?

We believe 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 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, we believe fundamentals are robust. EM corporate balance sheets are the strongest they’ve been since the global financial crisis, underpinned by prudent management and favorable 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, we believe EMD is benefiting from a range of positive forces across the asset class – making it a timely and well-diversified opportunity for investors.

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

We believe the next year will be 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 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 believe this positive momentum will continue for the foreseeable future.

Which frontier markets stand out as offering unique potential – and what are the risks?

Frontier markets present a diverse set of opportunities, each with their 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 of Ex- 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 of 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 $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.

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

We believe several themes are shaping the EMD landscape. The distinction between oil exporters and importers remains important, as is 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.

How do you balance sovereign vs. 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 (IG) 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.

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.

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 EMs, often creating a virtuous cycle of investment and growth. Additionally, rate cuts typically put downward pressure on the dollar, which can further enhance returns for local currency EMD strategies.

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

We believe 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.

For investors considering EMD today, what allocation strategies make sense – active vs. passive, hard vs. local currency, etc.?

We believe 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? We believe all areas of EMD have something to offer this year, allowing investors to tailor allocations to their objectives and market outlook.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Standard & Poor’s credit ratings are expressed as letter grades that range from “AAA” to “D” to communicate the agency’s opinion of relative level of credit risk. Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB-.

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