Fixed income
The case for emerging market debt in seven questions
5 min read 12 Mar 26
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2025 was a strong year for emerging market investors. Faced with geopolitical turbulence and a challenging macroeconomic environment, emerging market debt (EMD) has proved resilient.
Far from being a 2025 story, the strong performance seen in EMD represents the structural evolution of the asset class. Improving policy credibility, fiscal discipline and market depth have helped transform emerging market debt into a stable asset class, now trading at a similar volatility to that of developed markets.
This is particularly relevant at a time when US exceptionalism is beginning to be challenged, while other developed markets are also facing political difficulties and deteriorating fiscal conditions – a trend that is not likely to be resolved in the immediate future. For those seeking diversification, now could be the time to reconsider EMD.
In this Q&A, Charles De Quinsonas, Head of Emerging Market Debt at M&G Investments, shares his thoughts on what’s driving EM performance, the improving fundamentals and how M&G can capture opportunities within this evolving asset class.
Q. What makes EMD an attractive asset class right now?
EMD is really interesting at the moment because it typically offers attractive yields and genuine diversification benefits. A significant change over the years is that volatility in EMD has come down and is now much closer to what we see in developed markets. That’s thanks to stronger policy frameworks and better fiscal discipline across many EM countries. We’re also seeing structural improvements; lower debt-to-GDP ratios, credible monetary policies, and solid growth prospects. So, EMD isn’t just a tactical play anymore; it’s becoming a strategic allocation for many investors. Add to that a softening US dollar, rising US deficits, and concerns about debt sustainability in developed markets, and you’ve got a pretty supportive backdrop for EM assets.
Q. What’s the most compelling data point for you right now?
For me, the standout metric is the real yield advantage. A lot of EM countries are offering positive real yields, which is something you don’t often see in developed markets. Take Brazil, for example, the central bank moved early and aggressively on rates, well ahead of the Federal Reserve (Fed), which means investors are getting attractive real rates with inflation under control. Another big one is credit ratings; In 2024, we saw 14 EM sovereigns upgraded, the strongest year for net upgrades since 2011. And if you look at debt-to-GDP ratios, EM and middle-income economies average around 75%, compared to 110% for advanced economies. That’s indicative of relative fiscal improvement.
Q. How is M&G positioned to take advantage of these opportunities?
Our EMD team takes a very bottom-up approach. We spend a lot of time on fundamental country and issuer analysis, blending quantitative models with qualitative insights to spot turning points and avoid idiosyncratic risks. We look at sovereign and corporate debt together, not in silos, and we use proprietary tools for debt sustainability and internal ratings. Plus, we engage directly with issuers and policymakers, which gives us an edge. On top of that, we’re backed by one of Europe’s largest credit research teams: over 50 analysts with an average of 14 years’ experience.
Q. Is there a country or sector where you see the most opportunity?
Broadly speaking, we like local currency bonds with Latin America particularly on our radar, with countries such as Brazil and Mexico standing out thanks to high real rates and strong fiscal discipline. We are also seeing plenty of opportunity in Central Asia within countries such as Uzbekistan, Kyrgyzstan, and Kazakhstan. On the corporate side, EM companies with low leverage and strong interest coverage look attractive, especially since spreads are wider than fundamentals suggest. The beauty of EMD is its breadth, with nearly 100 investable countries. That allows us to gain exposure to structural trends like near-shoring, regional trade growth, and favourable demographics.
Q. How does M&G differentiate itself in this asset class?
I’d say it comes down to three things: flexibility, depth of research, and experience. We run an unconstrained strategy, so we can capture the best ideas across sovereigns, corporates, and local currency bonds, and do so in a very holistic manner. Our research is truly bottom-up, focused on anticipating turning points whilst managing risk which is a cornerstone of what we do as we see diversification, and not being concentrated, as a staple of our investment philosophy. And we have one of the strongest analyst teams in Europe, which means we’re not reliant on external ratings.
Q. What’s the most important development you think will impact EM in the coming years?
There are a few big themes. First, the continued strengthening of monetary and fiscal frameworks in EM countries which is a game-changer for stability. Second, demographics: 85% of the world’s population lives in EM, and many of these countries have growing working-age populations, which supports long-term growth. Then there are structural shifts like the energy transition, supply chain realignment, and digital transformation. And finally, we could see a sustained rotation away from US-centric portfolios as investors question US exceptionalism and look for growth elsewhere.
Q. What’s your outlook for EM bond markets?
We’re constructive on EM bonds. The carry is attractive, fundamentals are improving, and policy credibility is stronger than ever. Local currency debt looks particularly appealing with positive real yields and potential currency appreciation if the dollar weakens. Hard currency spreads are still interesting, though investment grade is starting to look more on the expensive side. Overall, EMD offers yield, growth, and diversification at a time when developed markets face mounting challenges. For investors looking to build resilient portfolios, it’s a compelling allocation.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
