Peter Kent, Co-Head of Fixed Income; Victoria Harling, Co-Head of EM Corporate Debt & CIO-Middle East; Thys Louw, EM Fixed Income Portfolio Manager; Alan Siow, Co-Head of EM Corporate Debt; and Nicolas Jaquier, EM Fixed Income Portfolio Manager at Ninety One
The past year marked a turning point for EM debt. It has increasingly been recognised for its portfolio diversification benefits at a time when developed market (DM) bond markets have faced mounting credibility challenges. Growing recognition that the lines between emerging and developed markets have blurred (the ‘EM-ification’ phenomenon) has driven a shift in perceptions, with the EM sovereign debt market cementing its status as a maturing and increasingly resilient asset class.
Peter Kent, Co-Head of Fixed Income: “EM debt also rose in relevance for many asset allocators thanks to its increasingly powerful portfolio diversification benefits. Ongoing credit-rating upgrades and credible policymaking across many EM economies further boosted its appeal. For many, the debate shifted from “why should I consider the asset class?” to “how can I get the asset class to work for me?”. EM fixed income’s many regional, currency and credit-quality variations have helped answer this question.”
Meanwhile, the strength of the EM corporate debt market shone out as US trade-tariff announcements provided a real-life stress test. EMs repeatedly showed resilience to tariff threats, with investors betting the eventual policy would be more benign. A central question for many asset allocators – particularly in light of credit spread tightening seen over 2025 – is whether investors are being adequately compensated for risk in EM corporate credit.
”Corporate debt valuations continue to incorporate a significant ‘postcode premium’ – whereby country-specific concerns keep EM corporate spreads wider than DM peers despite robust underlying fundamentals,” said Victoria Harling, Co-Head of EM Corporate Debt & CIO-Middle East. “A notable example is Turkey’s banking sector: in many ways, this ‘looks’ like an investment-grade market but a challenging macroeconomic backdrop means that Turkish sovereign debt (and therefore corporate issuers) is stuck in the high-yield category. Investors can still earn relatively high yields on high-quality bonds in this inherently inefficient market.”
In both sovereign and corporate EM markets, opportunities to capture alpha persist across regions, but selectivity remains key, as outlined below.
Africa – explore the next frontier in fixed income
Significant diversification within Africa’s fixed income markets means that opportunities span a wide range of economies – from energy exporters such as Nigeria and Angola to reform-focused markets like Egypt, Kenya and Morocco. The Egyptian pound appears well placed to benefit from the country’s improving fiscal position and continued economic support from the Gulf. Thys Louw, EM Fixed Income Portfolio Manager: “The Nigerian naira remains an attractive source of carry, while on the hard-currency side, Senegal is on a positive trajectory thanks to ongoing economic reforms and resilient regional market access.”
However, not all markets are equally well positioned. Kenya’s recent currency and rates performance may prove difficult to sustain, with slow progress on fiscal consolidation reducing the likelihood of near-term IMF support. In a region marked by sharp divergences, selective positioning remains essential.
Asia – harness rate cuts and keep an eye on valuations
Across Asia, subdued inflation and modest growth are likely to prompt further interest rate cuts, particularly as governments pursue fiscal consolidation. This environment should provide support for local bond markets. From a growth perspective, Malaysia appears well placed, with foreign investment and resilient domestic consumption underpinning the ringgit. Thailand, by contrast, faces political uncertainty ahead of elections in February; this warrants caution on the baht as the formation of fragile coalitions could lead to renewed inter-party disagreements. Meanwhile, China’s export strength will likely remain a prominent theme, with several countries already expressing concern about its sizeable trade surplus and its role as a key engine of economic growth.
Alan Siow, Co-Head of EM Corporate Debt: “For corporate debt investors looking at Asia, expensive valuations mean greater selectivity is required. That said, the region is emerging as the global AI factory, providing the infrastructure on which US-developed AI models will run.”
CEEMEA – cast a wide net to uncover the best risk/return profiles
The CEEMEA region offers one of the widest dispersions of risk and return. South Africa remains a relative bright spot with ongoing fiscal discipline, reform momentum and an anchoring of inflation expectations painting a positive picture. Turkey’s macroeconomic stabilisation efforts are expected to continue, supporting the lira carry trade despite persistent political risks. In Central and Eastern Europe, relatively strong growth and a positive German fiscal impulse create uncertainty around the extent of interest rate cuts, with Hungary’s outlook further complicated by a hotly contested election. More broadly, the outlook for the Russia-Ukraine war remains a key unknown, with any move towards a lasting peace deal positive for the wider region’s fundamentals and risk premia. Regardless, growth in the Caucasus and Central Asia should remain strong, helped by continued structural reforms and prudent macro policy; Kazakhstan and Uzbekistan are particularly interesting markets.
Harling continued: “When looking at EM corporate debt, the Middle East is a region to watch – this is becoming an increasingly dynamic and well-diversified opportunity set. It now comprises more than 100 issuers, the majority of which are investment grade, with strong fundamentals. Saudi Arabian corporates look particularly attractive – they typically offer an attractive spread pick-up relative to Asian credit with an equivalent rating, while also being less volatile.”
Latin America – keep an eye on elections and seek out strength
Nicolas Jaquier, EM Fixed Income Portfolio Manager: “Politics will dominate the investment landscape in Latin America in the year ahead, with elections scheduled in several major economies; investors should watch carefully for signs of fiscal loosening/premature monetary policy easing.”
For Mexican assets, the United States-Mexico-Canada (USMCA) trade agreement review will be the defining catalyst, influencing trade expectations, investment flows, and investor confidence. Within EM FX, look for markets with strong terms-of-trade such as Chile and Peru. On the hard currency side, Ecuador is a structurally improving economy, with record current-account surpluses and FX reserves; it is anchored by an on-track IMF programme, yet its debt offers a generous risk premium.
Turning to events unfolding in Venezuela at the time of writing, regime change in the absence of a major military escalation is among the more optimistic scenarios market participants had anticipated during the recent build-up of forces in the region. Jaquier said: “Investors should monitor closely political developments in the country as a successful restructuring ultimately requires a legitimate government able to credibly commit to reforms, typically anchored by an IMF support programme. In terms of the broader regional impact, Cuba’s economy stands to lose access to heavily discounted Venezuelan oil; at the other end of the spectrum, if stability is maintained and Venezuela eventually reopens its economy, Colombia stands to benefit most in terms of bilateral trade.”
Siow stated: “Within Latin American corporate debt, there are plenty of interesting opportunities in defensive sectors, such as utilities and financials, in Mexico and Colombia, as well as in cyclical sectors like metals and mining via global exporters in Brazil and Chile. The developments in Venezuela have the potential to have far reaching consequences across the corporate space in Latin America and across EM more broadly, chief among these being the longer term trajectory of oil prices. This could create attractive opportunities, but investors will have to be vigilant on attendant risks as well.”
EM debt has entered a more resilient and mature phase. Despite a stellar year for asset-class performance, market mispricing remains rife and alpha-capture opportunities can be found across the globe. Careful navigation remains key in this increasingly diverse investment universe.
ENDS
