Kristin Ceva, head of emerging markets debt strategies at Payden & Rygel, shares insights and highlights where investors may find value in today’s complex macro landscape.
Emerging Market Debt Highlights:
· Structural Opportunity in EM Debt: EM debt remains underappreciated despite offering attractive income (7–8 per cent yields), broad diversification (up to 80 countries), and exposure across sovereign, corporate, and local currency markets.
· Positive Outlook Amid Global Shifts: With developed market growth expected to remain sluggish (~1.5–2 per cent), EM economies are forecast to grow at 4 per cent+, supported by normalised inflation and sound external balances.
· Rethinking Risk Perceptions: The EM debt universe has matured—greater transparency, broader credit spectrum (from AA to lower-rated issuers), and improved data make it a more sophisticated and investable asset class.
· Attractive Valuations & Currency Upside: EM currencies may be poised for appreciation against the US dollar, which is historically overvalued. This currency angle adds a compelling layer of potential return.
· Diversified Geographic Bets: We see strong opportunities across a range of countries and sectors—from local bonds in Brazil, Mexico, and Indonesia, to sovereign credit in Argentina and Morocco, to EM corporates in India, Mexico, and Chile.
· Complement to U.S. Corporate Bonds: EM debt offers diversification and often higher yields than similarly rated US corporate debt—especially timely given investors’ high concentration in US assets.
· Strategic Portfolio Adjustments: In response to geopolitical shifts and rate dynamics, we trimmed riskier high-yield positions, increased local bond exposure (to benefit from disinflation trends), and selectively added currency risk.
How do you view the macroeconomic backdrop for EM debt right now — are the stars aligning for this asset class?
Global investors may have become overallocated to the US in recent years. The world’s exposure to US equities and bonds looks disproportionately high versus its share in global output or trade. As US policies turn inward and investors consider reducing their US concentration, EM debt presents significant opportunities.
EM debt remains one of the most underappreciated sectors in public markets, and we believe investors should maintain a structural allocation to this asset class.
What’s your outlook for the next 12–18 months? Where do you see the greatest opportunities — and the biggest risks?
The outlook for the next year is positive, overall. EM growth rates have been resilient. In a context where growth in the developed world may struggle to exceed 1.5-2 per cent, EM countries, in aggregate, are expected to expand at a rate of 4 per cent or more. Inflation rates in EM economies have normalised, and most EM central banks have room to lower policy rates. Countries’ balance-of-payments positions are sound; this means they are less reliant on foreign financing, making them resilient to shifts in capital flows.
While US tariffs caused a stir, the US quickly backed down from worst-case outcomes. The EM debt sector is by and large shielded from dramatic tariff effects. EM countries have been diversifying trade relations over many years, and most have low or manageable exposure to the US market. Tariff effects may have the most impact in places like China and Europe, neither of which are featured prominently in EM debt portfolios.
One of the top risk factors that can affect EM countries as a whole, is the strength of the US dollar. During times when capital flows shift heavily towards the US, it leaves EM countries with less funding and puts pressure on EM central banks to run tighter policy to manage the fallout. This risk factor has been diminished in the current context.
One opportunity for investors is the potential appreciation of EM currencies, particularly against the US dollar. Also, with inflation contained and possible disinflationary forces brewing – including slower growth, lower energy prices and stronger currencies – duration in non-US bond markets is looking more interesting.
We believe that elevated all-in yields in EM debt compensate investors well for the choppier waters in the global economic landscape.
EM bonds often carry a perception of high risk. What do you say to this?
EM debt has existed for over 30 years and has matured as a sector. There is a greater array of countries and companies to invest in than ever before. Borrowers are more communicative and transparent, while information quality and data availability has improved. The investor base is seasoned and sophisticated. The trading environment is vibrant, allowing for efficient pricing of risk.
From a broader perspective, emerging markets, which are already home to the bulk of the world’s population, are also producing a growing share of the world’s output. The developed world is ‘greying’ fairly quickly, whereas the developing world is not.
Are there specific regions or countries you’re especially bullish on right now?
We see value in local bond markets, including Brazil, Mexico, Peru, Indonesia, Hungary, Czechia, Turkey, South Africa and Egypt. We are taking on the currency risk in some situations, while hedging away currency risk in others. Given the narrower than usual gap between US and EM policy rates, several markets offer attractive carry even if the currency risk is hedged.
In sovereign credit, we see opportunities in Argentina, Uzbekistan, Paraguay, Costa Rica, Guatemala, Sri Lanka, Mexico, Hungary, Ghana, Zambia, Morocco and Albania, among others.
In the EM corporate space there are a variety of interesting opportunities. A few we like are Brazilian consumer, industrial and transportation companies, financial and utility names in Mexico, utility and telecom companies in India, Peruvian financials, Guatemalan consumer and Chilean utilities.
Have you made any significant shifts in your portfolio recently in response to geopolitics, elections, or central bank moves?
We have made three main portfolio shifts. First, we have pared back risk in certain high yield credit markets, particularly those with greater oil exposure. We still like the attractive income of high yield, and we are overweight this part of the market, particularly ‘BB’ rated issuers. But we are mindful of the impact of market volatility on more vulnerable credits. Second, we have increased holdings of local bonds, with the idea that duration can perform well outside of the US in a broadly disinflationary environment. Finally, we have taken increased currency exposures against the US dollar.
