In a very positive year for emerging market (EM) corporate debt, the strength of the asset class stood 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: the so-called TACO trade became the dim sum and feijoada trades1, as markets from Mexico to China and eventually Brazil held up better than initially feared. Mexico - considered one of the highest-risk markets in the context of tariffs - was one of the top-performing positions in our portfolios, as we retained conviction through the brief sell-off in April.
A similar phenomenon played out in the oil and gas sector, where bonds sold off materially when tariffs were first announced, creating opportunities to add exposure to fundamentally strong issuers at attractive valuations. This is informative for the path ahead, as geopolitical risks remain front of mind: initial market reactions to negative headlines remain indiscriminate in this asset class, resulting in mispriced opportunities that active investors can exploit.
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. In our view, the answer remains “yes”.
First, valuations continue to incorporate a meaningful ‘postcode premium’ – whereby country-specific concerns keep EM corporate spreads wider than developed market (DM) peers despite robust underlying fundamentals. This looks even more generous in the context of today’s heightened DM volatility regime. Furthermore, although in 2025 credit rating upgrades exceeded downgrades for the first time in over a decade, many EM corporate issuers would have a higher rating today if they were not constrained by sovereign ratings. For example, Turkey’s banking sector ‘looks’ investment grade – benefitting from strong capital buffers and state support – but a challenging macroeconomic backdrop means that Turkish sovereign debt (and therefore corporate issuers) is stuck in the high-yield category. In effect, investors can earn relatively high yields on high-quality bonds in this inherently inefficient market.
Secondly, income is what really matters to EM credit investors, and the compounding effect on returns when reinvesting coupons at high yields is compelling. Historically, current yield has been the strongest predictor of forward-looking 12-month returns; with the JPMorgan Corporate Emerging Markets Bond Index (CEMBI) yield ending 2025 at 5.9%, valuations look attractive on an absolute basis, pointing to a constructive outlook for 2026.
We see a healthy and well-balanced supply picture in EM corporate credit. Last year, gross issuance rose at its fastest pace since 2021. However, companies are issuing into supportive demand, and for the fourth year in a row, EM companies redeemed more debt than they issued. Importantly, many EM corporates retain ready access to deep and liquid local markets. Access to funding from local markets can benefit companies by providing flexibility and a better understanding of the local environment and regulations. In the face of higher US interest rates, EM companies are increasingly tapping into this source of funding, which can boost the resilience of their balance sheets and diversify their funding channels. Overall, while supply has been strong, these trends support demand for higher-quality, longer-dated corporate debt, which may continue to underpin the case for tighter spreads.
The Middle East is becoming an increasingly dynamic and well-diversified opportunity set in the EM corporate debt universe. The region now comprises more than 100 issuers, the majority of which are investment grade. Fundamentals are strong: issuers typically operate with lower net leverage, higher EBITDA margins and lower default rates compared to peers. We find Saudi Arabian corporates particularly attractive – they tend to offer an attractive spread pick-up relative to Asian credit with an equivalent rating, while also being less volatile.
Within 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. The launch of DeepSeek, a China-made AI model operating at a fraction of global peers’ cost, has the potential to flatten global technology barriers, which would benefit energy-poor and tech-lagging regions.
Elsewhere, Latin America remains a rich source of opportunities for bottom-up investors, making the region a key overweight in our portfolios. We see 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. Developments in Venezuela - following the US strike and the extraction of Nicolás Maduro - could have far-reaching consequences across the corporate space in Latin America and across EM more broadly. Chief among these is the longer-term trajectory of oil prices. This could create attractive opportunities, but investors will need to be diligent on attendant risks.
We are cautious on cyclically exposed sectors that could feel the indirect effects of tariff-related slowdowns; we have reduced exposure to industrial and consumer sectors to reflect expectations of a slowdown in domestic consumption. Overall, however, the combination of attractive yields, resilient fundamentals and an increasingly diverse opportunity set leaves EM corporate debt well positioned entering 2026.
1 TACO: Trump Always Chickens Out – referring to President Trump’s tariff threats proving worse than eventual action. Dim sum bonds are renminbi-denominated Chinese bonds that are listed offshore.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance-related risk events or factors, if they occur, could cause a negative impact on the value of investments. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Individual securities named in this material are included for illustrative purposes only.
Specific risks. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments or repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Liquidity: There may be insufficient buyers or sellers of particular investments giving rise to delays in trading and the ability to settle trades, and/or large fluctuations in value. This may lead to larger financial losses than might be anticipated. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
