Half (50%) of UK wealth managers recently surveyed by Franklin Templeton identified emerging markets as the most attractive equity opportunity over the next 12 months. The findings indicate renewed interest in emerging markets overall, with improving macroeconomic factors also reinforcing the case for emerging market ( EM) debt as an asset class.
“Country selection is key”
EM debt posted modest gains in June as easing Middle East tensions and falling energy prices helped offset the impact of hawkish Federal Reserve signals and market volatility. While local currencies weakened against the US dollar, local bond markets benefited from lower interest rates, showing the importance of looking beyond headline market moves.
Investment manager Payden & Rygel expects resilient growth, contained inflation, positive real interest rates and limited external financing needs to continue supporting EM debt, with sovereign credit upgrades outpacing downgrades over the past three years. Interest in diversification has supported EM assets despite geopolitical volatility, while the opportunity set across nearly 90 countries continues to strengthen the case for EM debt as a strategic allocation, according to Payden & Rygel. Many EM central banks were already ahead of inflation when energy prices surged, reducing the need for further monetary tightening and helping support local bond markets.
That diverse opportunity set is also highlighted in a Morningstar report, which says that investors should no longer view EM debt as a single asset class. Instead, it consists of three segments: hard currency sovereign bonds, local currency sovereign bonds and corporate bonds. Each offers different risk, return and diversification characteristics.
Morningstar estimates the EM debt market has expanded to around $9 trillion, with local currency bonds accounting for roughly $6.7 trillion, while hard-currency sovereign and corporate debt each represent about $1 trillion. The market’s growth has improved liquidity and lowered trading costs, while historical default experience has challenged traditional perceptions of risk.
Christopher Mey, head of EM debt at asset manager Candriam, expects volatility to be driven by country-specific politics and policy decisions rather than one big global shock. Investors should focus on market dispersion rather than treating EMs as a single trade, adds Mey.
For Marcelo Assalin, partner and head of the EM debt team at William Blair Investment Management, EM debt continues to offer opportunities for European investors navigating a low-yield developed market landscape.
Sovereign fundamentals have also strengthened in recent years. External balance sheets have improved through foreign direct investment, generally healthy current account positions and continued capital inflows into the asset class, says Assalin. Growth has also remained resilient across much of the emerging world, including countries hit by energy market disruptions, thanks to diversified trade routes and stronger reserve buffers.
Local currency markets remain attractive, shares Assalin, because real interest rate differentials between emerging and developed economies continue to be wide. “Country selection and idiosyncratic stories remain key,” Assalin says, pointing to differences in fiscal trajectories, external financing needs and central bank credibility across individual countries.
“Traditional risk metrics are becoming less reliable in isolation,” says Assalin, adding that headline debt and leverage ratios fail to capture improvements in external liquidity, financing flexibility and policy credibility across many emerging economies. Investors should focus on country-specific fundamentals rather than benchmark-level metrics when assessing opportunities.
Despite tighter credit spreads than in previous years, EM debt still offers a meaningful yield premium over developed market and investment grade fixed income. Many sovereign issuers are now in a stronger liquidity position than headline figures suggest, reinforcing William Blair’s constructive outlook for H2 2026 across both hard and local currency markets.
While hard currency sovereign spreads remain tight by historical standards, EM investment grade debt still trades at a premium to US investment-grade credit, while EM high yield continues to offer a wider spread than its five year average relative to US high yield. According to Mey, hard currency corporate bonds also continue to provide attractive yields versus comparable US credit, despite carrying an average BBB rating.
UK investors boost emerging markets allocation, survey shows
“Research-driven allocations”
Asset manager Janus Henderson likewise sees active management rather than broad market exposure as the key to generating returns, shares Mia Söderberg, client portfolio manager for EM debt.
Rather than relying on elevated market beta, Janus Henderson seeks to generate excess returns through careful credit selection while hedging foreign exchange and duration risks back to benchmark levels. As a result, country and security selection become the drivers of performance.
“The best opportunities emerge from research-driven allocations to countries and issuers undergoing positive structural change or experiencing significant market dislocations,” Söderberg says.
Although spreads across the broader asset class remain relatively tight, Janus Henderson sees opportunities among shorter maturity bonds issued by improving high yield borrowers. These securities offer attractive carry while also providing potential for spread compression as credit fundamentals strengthen.
Asia ex-China is identified by 53% as offering the strongest growth potential over the next three to five years, followed by India (43%), while Latin America is viewed as the most underappreciated opportunity (23%), according to the Franklin Templeton survey.
Mongolia remains one of Janus Henderson’s highest conviction positions. Söderberg points to economic growth, falling debt ratios, rising foreign exchange reserves and continued policy reforms as evidence of one of the strongest EM credit improvement stories. While political developments need monitoring, investors are compensated for those risks and the firm maintains a constructive long-term view based on its on-the-ground research visits.
The firm also favours the relatively new issuance from the Republic of Srpska within Bosnia and Herzegovina. Low public debt levels and the medium-term anchor provided by the country’s EU accession process support its investment case despite political and demographic challenges.
Elsewhere, Söderberg identifies value across selected higher-yielding sovereign issuers in Sub-Saharan Africa, including Benin and shorter-dated Angola bonds, while Argentina remains a preferred market through carefully selected provincial issuers.
Opportunities also exist within the euro-denominated EM bond market, Söderberg shares, an area that often receives less investor attention than US dollar issuance. “Several Latin American sovereigns have recently issued euro-denominated bonds offering attractive yields relative to comparable US dollar bonds once currency and duration exposures are hedged, creating opportunities for active managers prepared to look beyond the benchmark universe.”
“Local debt offers compelling value”
Mey believes foreign exchange remains the key determinant of returns, meaning investors should remain selective in their currency exposure.
Guillaume Tresca, senior EM strategist at Generali Investments, says: “More specifically, we continue to see value in local debt.” Resilient economic activity, limited growth revisions and attractive carry continue to underpin the asset class, and EM rates still offer appealing real-yield buffers, while markets are likely to continue unwinding the earlier interest-rate hike expectations that emerged during the initial stages of the conflict.
Although emerging market currencies weakened following the Federal Reserve’s hawkish June meeting, valuations and diversification benefits do not justify extrapolating recent US dollar strength. “Technicals are supportive for local debt as well: foreign ownership remains low by historical standards, while renewed inflows are building up,” says Tresca.
AI is also proving to be a structural tailwind for local debt, shares Tresca. Demand for North Asian exporters and commodity-producing economies is generating sizeable trade surpluses, much of which is being recycled into domestic fixed income markets, providing support beyond traditional macroeconomic drivers.
Exposure alone is not enough. Instead, research, active country selection and security analysis are becoming the defining characteristics of investing in a strategically important asset class like EM debt.