Where we see opportunity in emerging markets debt in 2026

In 2025, emerging market (EM) fixed income has shown resilience amid economic and geopolitical challenges, with hard currency EM sovereign bonds returning over 12% and local bonds achieving a 15% gain. This performance underscores the balance between capital appreciation and high-income yields within these markets. Looking forward to 2026, while acknowledging rich valuations on a spread basis, the robust fundamentals of EM debt present ongoing opportunities for investors.

The anticipated easing by the US Federal Reserve could further bolster this asset class by maintaining attractive high yields. Investors might find potential in "Selective Frontier" Markets like Nigeria, Sri Lanka, Ecuador, and Argentina as they progress toward mainstream status. Additionally, countries such as Turkey, South Africa, and Brazil are aligning more closely with developed markets through solid macroeconomic policies.

A noteworthy trend is the weakening US dollar in 2025—a shift providing a unique opportunity for EM investments as local-currency bonds can benefit from appreciating currencies alongside high real interest rates. This paradigm shift offers potential foreign currency gains that could be significant drivers of alpha in the coming year.