Emerging markets debt investment views – March 2026
We have downgraded our view on EM currencies and reduced risk amid the Middle East conflict. We continue to favour commodity-exporting nations in Latin America.
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After a strong start to the year, the conflict in the Middle East has led to a correction in emerging markets (EM) debt. At the time of writing (5 March), EM local currency debt, as measured by the GBI-EM GD (Government Bond – Emerging Market Index Global Diversified), dropped by 2.8% from peak. This was largely driven by a correction in currencies, thus reducing year-to-date gains to +1.4%. EM dollar denominated debt has shown so far greater resilience with a drop of -1% from peak, which has taken the year-to-date performance of this sector to +1.5%.
Prior to the attacks, we began positioning our portfolios for a scenario of this sort, notably by reducing exposure to EM currencies that appeared vulnerable to a selloff following the heavy positioning built up by market participants in recent months.
Our EM debt portfolios also maintained very defensive exposure to the Middle East region, with the exception of Egypt, where we remain invested. Egyptian assets have generated strong returns in recent months and, despite current uncertainties, we believe that Egypt is relatively well positioned to weather the current shocks. We returned from our research trip to Cairo, which coincided with the beginning of the conflict, with the conviction that the country has built sufficient buffers in recent years.
While we had viewed renewed US attacks on Iran as a distinct possibility, we have nevertheless been somewhat surprised by: (i) the timing, given that diplomatic channels were open until very recently; and (ii) Iran’s attacks on infrastructure in neighbouring countries not directly involved in the conflict (UAE, Qatar, Bahrain, Kuwait, Saudi Arabia and even Oman). This has clearly increased the risk of an uncontrolled regional escalation, with potentially serious and long-lasting consequences for oil supply and shipments via the Strait of Hormuz, where activity has already collapsed. For more on the outlook for commodities, please see Iran conflict and the implications for oil and other commodities
The situation remains extremely uncertain and highly fluid. Initial expectations that the death of Iran’s Supreme Leader, Ayatollah Ali Khamenei, and other senior officials, might lead to a rapid de-escalation have not materialised. The regime appears capable of managing succession and maintaining its authority.
As a result, there is a significant risk that the situation evolves into either a prolonged regional conflict and/or a fragmentation of Iran into a failed state, potentially leading to civil conflict between competing factions. Historically, the region has rarely experienced smooth regime transitions.
These dislocations are likely to sustain the current upward pressure on oil prices, keep geopolitical risk premia elevated, and potentially weigh on global risk appetite. For this reason, we have reduced risk further in EMD portfolios following our downgrade of EM currency score from positive to neutral, as shown in our scorecard. In contrast, we kept all other EM sectors at reasonably attractive scores. Several EM economies have demonstrated in recent years a strong ability to absorb a succession of external shocks thanks to their strong balance of payments positions and their extremely low reliance on short-term foreign capital.
Moreover, we continue to heavily favour several commodity exporting nations in Latin America that still offer appealing valuations, are less exposed to the consequences of Middle East conflicts and stand to benefit from the upward pressures on commodity prices.
These views are summarised in our sectoral scorecard below.
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