Looking into 2026, we see five themes driving our outlook for emerging market debt.
- Theme 1: Macro tailwinds and AI momentum — uneven gains
Global growth in 2026 is expected to moderate but remain positive, creating a more stable macro backdrop, but the benefits for emerging markets (EM) will be uneven. Meanwhile, the acceleration of investment in artificial intelligence continues to broaden the global growth impulse. Tech manufacturing hubs such as Korea, Taiwan, and Malaysia stand to gain most from AI-driven demand for semiconductors and data-centre infrastructure, while India and the Philippines, with less exposure to hardware, may see limited upside and face labour-market pressures from generative AI adoption.
- Theme 2: EM fundamentals — resilience on trial
Emerging markets have shown remarkable resilience through recent global shocks, from the pandemic to geopolitical tensions. However, 2026 is likely to test that resilience more than 2025, and the ability to withstand headwinds will vary across countries. While credible policy frameworks and stronger buffers position EMs better than in past cycles, differentiation within the asset class is becoming more pronounced.
- Theme 3: EM local currency carry and technicals — a powerful but selective tailwind
EM local currency debt is supported by a combination of attractive yields in many parts of the sector, favourable technical factors and ongoing monetary easing cycles in select markets. In recent years, many EM central banks moved early to curb inflation, often tightening ahead of developed markets. This proactive stance has left real yields at historically high levels — particularly in Latin America and South Africa — creating attractive income opportunities.
- Theme 4: Dollar softness unlocks upside for some EM currencies
After years of exceptional strength — a major headwind for EM local currency returns — the US dollar began facing structural challenges in 2025. Dollar valuations are still stretched, positioning in US assets remains heavy, and the drivers behind outsized US growth have been losing steam. Meanwhile, the dollar’s yield advantage is eroding as global rate differentials narrow.
These dynamics could open the door for EMFX to deliver even further gains in 2026, but results will be increasingly differentiated across regions and currencies.
- Theme 5: Hard currency debt — idiosyncratic and reform-driven opportunities
Hard currency debt calls for a highly selective approach, prioritising alpha over beta as valuations tighten. Opportunities are concentrated in markets where structural reforms, post-crisis recoveries, or leadership transitions are reshaping credit profiles. External anchors — such as IMF programs, international support, and improved geopolitical ties — further strengthen the case for targeted exposure.
