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The path of the COVID-19 pandemic and the global macro environment are likely to be key drivers of returns for emerging markets (EM) debt in 2021, as they were in 2020. Continued monetary and fiscal stimulus, a recovery in developed economies and less aggressive geopolitics have the potential to create a virtuous cycle for EM debt. On the other hand, rising national debts funded in international capital markets pose risks, as do looming elections in some EM countries. The specifics of each developing economy and local politics are likely to influence returns, leading to meaningful divergence within the asset class. We see pockets of value in both U.S. dollar and local currency debt. While sovereign bonds continue to provide the bulk of the investment opportunity, we also find value in select corporate bonds.
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