Emerging markets debt investment views – April 2026
Policy orthodoxy, solid external accounts and manageable debt dynamics mean many EM economies have significant buffers to weather a potential stagflationary shock.
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The risk of a global stagflationary shock has materially increased. The war in the Middle East and the extraordinary disruptions to oil supply have mechanically pushed inflation expectations higher across both developed and emerging markets (EM).
Despite the global economy becoming less oil-intensive in recent years, we still expect global growth to be negatively impacted. Skyrocketing energy prices affect disposable income, lead to second round effects on supply chains, and cause the demand destruction and energy rationing that we are starting to witness in several countries.
Notwithstanding the recent ceasefire, the impact of the conflict risks steering the global economy toward a stagflationary path. Central banks face even more delicate policy trade-offs given the limited effectiveness of monetary tightening in the face of a supply shock. In emerging markets, however, initial policy responses have so far preserved orthodoxy: many authorities are allowing energy prices to adjust and are permitting some degree of demand destruction.
Key EM economies are also entering the current geopolitical shock with already high real rates, strong balance of payments positions and reduced reliance on foreign capital.
Latin America appears to be the most insulated region from the current crisis, with several economies benefiting from energy and/or broader commodity self-sufficiency. The region also offers some of the most attractive valuations across emerging markets, alongside potential positive political catalysts, as upcoming elections in Colombia, Brazil, and Peru could lead to a more favourable policy backdrop once new administrations are in place.
The global financial system has entered the current geopolitical shock with abundant liquidity conditions, contributing to the relatively orderly correction in EM assets and to some resilience of EM currencies. We expect liquidity conditions to remain broadly supportive unless central banks are forced into aggressive tightening, an outcome we view as unlikely given the deteriorating growth backdrop.
A more material risk is a renewed rise in developed market (DM) government bond yields, which are now threatening to break above the trading ranges that have prevailed over the past three years. A sustained increase in DM yields would tighten global financial conditions more meaningfully and could test the resilience that EM assets have shown so far. Therefore, a cautious stance on interest rate duration remains warranted.
The US dollar’s structural vulnerabilities are currently eclipsed by its perceived safe-haven status and by the US’s relative energy self-sufficiency. However, we expect the dollar’s cyclical downturn initiated last year to resume in due course, given its still expensive valuations and the unsustainable levels of US fiscal and external deficits.
We are also encouraged that a recent sharp sell-off has reduced crowded long positions in EM currencies, which has reduced the risk of a disorderly unwind in currency carry trades.
EM local currency debt remains our top sectoral preference for 2026. Despite worsening inflation expectations, high real rates and favourable EM debt dynamics relative to developed markets offer significant buffers. We think 12 months expected returns exceeding 10% can potentially be achieved in local debt markets such as Brazil, Colombia, South Africa and Hungary.
Despite less appealing hard currency debt spreads, selective high-yield sovereigns and corporates still offer stable credits metrics and appealing income. In particular, we expect several high yielding oil credits such as Nigeria, Angola, Ecuador and Venezuela to generate handsome returns.
These views are summarised in our sectoral scorecard below.
Scorecard
Note: Interest rate duration refers to US rates performance. EM dollar debt IG forecasts investment grade hard currency debt, while EM dollar debt HY forecasts non-investment grade hard currency debt. Investment grade bonds are the highest quality bonds as determined by a credit rating agency. High yield bonds are more speculative, with a credit rating below investment grade. EM local rates forecast EM local currency bond prices, and EM currencies forecast EM currencies versus the US dollar.
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