- Emerging markets have structurally strengthened over the past two to three years, supported by improved policy dynamics, resilient growth, deeper capital markets and rising credit quality, while some developed economies now exhibit ‘EM-style’ fiscal and policy risks.
- Decoupling dynamics and structural US-dollar weakness are creating supportive conditions for EM assets, with attractive starting yields and broad opportunities across credit, rates and foreign exchange.
- Fundamentals across EM fixed income remain resilient, including scope for further rate cuts, robust corporate credit opportunities and materially improved sovereign high-yield risk profiles following restructurings and IMF support.
A transformed EM landscape
The emerging market (EM) investment landscape has structurally transformed over the last two to three years. The themes of 2020–2022 — post-pandemic financial weakness, the removal of Russian assets, un-investable China and higher inflation — have been replaced by improved fiscal and monetary policy dynamics, solid current-account trends, deepening local capital markets and resilient economic growth.
The result is higher credit quality, lower interest rates and appreciating currencies. In what could be considered a twist, several advanced economies are now displaying what might previously have been viewed as ‘EM-style risks’, including worsening policymaking and deteriorating fiscal trends.
Decoupling dynamics and the US dollar
Sweeping US tax, trade and immigration policy overhauls — including a sharp rise in the effective US tariff rate — were widely expected to affect growth, trade and investment across EM and the rest of the world. Instead, aggressive policymaking has contributed to geopolitical fractures and extensive decoupling, weakening the US dollar.
China’s historic trade surplus of USD 1.19 trillion in 2025 demonstrates not only how far it has reduced its dependence on the US, but also the underlying strength of demand across Asia, Europe, the Middle East, Africa and Latin America.
Baseline conditions and market drivers
The baseline scenario for EM in 2026 is a continuation of current trends, supported by still-attractive starting yields and a wide range of idiosyncratic opportunities across credit, rates and foreign exchange.
There remains potential for further US-dollar weakness, reflecting structural fiscal concerns, pressure on Federal Reserve independence and EM currency valuations that remain well below the historic highs of the pre-2008 bull market.
EM central banks, on average, are expected to continue cutting interest rates amid low inflation and resilient currencies, meaning long-duration opportunities in selected countries may still offer value.
Corporate credit remains a resilient area of EM, with multiple opportunities across regions and sectors at attractive valuations.
Sovereign high-yield debt has delivered strong performance over the past two to three years, supported by significant political change, successful restructurings and widespread IMF support. As a result, potential systemic stress has been materially reduced in a segment historically more susceptible to downside risk, with a long list of beneficiary countries.
