Emerging markets update: Resilience through volatility

The temporary U.S.-Iran truce has eased market stress, lifting global equities and bonds while pushing oil and gas prices lower. That relief has helped EM credit spreads return to pre-war levels, though energy markets still face a meaningful risk premium because the Strait of Hormuz remains a source of uncertainty.

Even so, the EM debt backdrop looks resilient, supported by improving sovereign ratings, stronger external buffers, and growth that is still expected to outpace developed markets. Capital markets remain open and funding needs for many issuers have already been met, which should help limit near-term pressure on credit quality.

We continue to favor hard-currency debt over local-currency exposure because it offers better protection in a more volatile environment. Within EM, higher-yielding sovereigns with strong reform stories and low sensitivity to broad risk sentiment look most attractive.

Local-currency opportunities remain selective and are best found in markets with high real yields and credible policy settings. Overall, investors should stay balanced: geopolitics may keep energy prices elevated, but the asset class still offers relative value where fundamentals are improving.