What’s your outlook for EMD in 2026?
Despite the economic and geopolitical challenges of 2025, emerging market (EM) fixed income has performed strongly. Year-to-date, hard currency EM sovereign bonds have returned over 12%, while EM local bonds have delivered an impressive 15%1. These returns have been well-balanced between capital appreciation and a steady, high-income stream.
Looking ahead to 2026, we remain constructive on EMD. While valuations are rich on a spread basis, EM fundamentals remain robust. We anticipate further easing by the US Federal Reserve, and the high yields available in the asset class should support continued positive returns.
Which regions or countries look the most attractive, and why?
We favour two key groups of EM countries. The first are ‘Selective Frontier’ Markets. These are next-generation, low-income countries progressing toward mainstream EM status. We see strong potential in Nigeria, Sri Lanka and Ecuador. Additionally, recent developments in Argentina are encouraging and may help solidify President Milei’s reform agenda.
A second group we like are the countries aligning more closely with developed market peers and are supported by orthodox macroeconomic policies that have anchored spreads. Here, mid-beta names include Turkey, South Africa and Brazil. These markets offer a valuable income component across several of our EM strategies.
How are you positioning the portfolio to take advantage of the themes you’re liking for next year?
A major theme in 2025 has been the weakness of the US dollar, which is down over 7.5% year-to-date2. Uniquely, it remains one of the few asset classes that has not recovered post- ‘Liberation Day’, presenting a compelling opportunity for EM investors.
Historically, EM local bonds have suffered due to dollar strength. However, we believe a paradigm shift is underway. In response, we are selectively increasing exposure to local currency bonds, which offer potential FX gains from appreciating EM currencies and high real interest rates. We believe exposure here could be a significant source of alpha in 2026.
