Navigating Rates

Dispelling myths in emerging market debt

Improvements in fiscal competence and policymaking are transforming perceptions of emerging market debt.

Key takeaways
  • Emerging market debt is a large, diversified asset class that has delivered strong performance thanks to big improvements in policy and governance.
  • In our view, negative perceptions of the asset class – ie, that it is “too risky” – are outdated.
  • We argue emerging market debt should be a strategic allocation in portfolios because of its potential to provide diversified alpha and compelling risk-adjusted returns.

Emerging market debt has its origins in the 1990s, when defaulted sovereign bank loans were restructured into tradable hard currency (US dollar) bonds known as Brady bonds. The asset class has grown hugely since then – many more issuers have come to market and total assets have boomed (see Exhibit 1). Yet some negative attitudes formed in the early days of the asset class have proved persistent, even though they no longer reflect reality. In this article, we will puncture some of the myths about emerging market debt.

Myth I: Emerging market debt is suitable only for a few specialised investors

Emerging market debt is sometimes considered a niche asset class that is appropriate only for a limited set of investors with a high risk tolerance. The perception is that liquidity is low and credit events frequent in this space. For those who hold this view, it is no wonder that emerging market debt accounts for a small or non-existent allocation in many portfolios.

Reality: Emerging market debt is a large and well-diversified asset class

Emerging market debt has undergone a remarkable transformation over the last 30 years. Today, emerging market hard currency bond issuers span over 70 countries and include a wide array of opportunities across geographies and credit profiles (Exhibit 1).The landscape of emerging market local currency opportunities has also developed significantly, with the number of countries in the main reference index – the JPMorgan GBI-EM Global Diversified index – growing from 11 in the early 2000s to 19 today. Indeed, most emerging market issuance is now in local currency, reflecting growing and deepening domestic debt markets. With local dynamics taking on more importance, local currency opportunities have become a richer source of investment outperformance, or alpha. This evolution underscores what we see as the maturity and relevance of the asset class as a core component of global fixed income.

Exhibit 1: Emerging market debt has grown into a deep and diversified asset class

Myth II: Emerging market debt involves too much risk for too little return

For some investors, emerging market debt calls to mind high-profile defaults and financial crises, such as Argentina’s sovereign default in December 2001 or the Mexican peso crisis of December 1994. These events shape a perception that the asset class is inherently risky and unsuitable to deliver attractive risk-adjusted returns.

Reality: Emerging market debt has delivered strong risk-adjusted performance

Returns on emerging market debt have outperformed both US high yield bonds and US Treasuries over the past 30 years (Exhibit 2). Over this period, many emerging market countries have strengthened their institutions, adopted more prudent fiscal policies and built robust foreign exchange reserves, making them more resilient to shocks. As it has grown, the asset class has become more diversified, which can help to reduce contagion risk – if crises occur, they do not necessarily impact the entire asset class. With active management and thorough sovereign and credit analysis, we believe emerging market debt can offer attractive risk-adjusted returns and diversification benefits within a global portfolio.

Exhibit 2: Emerging markets have outperformed core fixed income over the last 30 years

Note: Total Return of J.P. Morgan EMBI Global Diversified Composite Index (JPEIDIVR Index), ICE BofA US Cash Pay High Yield Index and ICE BofA US Treasury Index, for a $100 Original Investment since 1993. EM External Debt: JPEIDIVR Index, US High Yield: J0A0 Index, US Treasuries: G0Q0 Index. Source: BofA Global Research, Bloomberg, J.P. Morgan EMBI Global Diversified Composite Index, ICE Data indices, LLC. Data as of 31 December 2024. Past performance does not predict future returns.

Myth III: Emerging market countries are poor at policymaking

Emerging market governments have often been viewed as laggards in policymaking. They are seen to be grappling with governance challenges and institutional instability that far exceeds what is found in developed markets. This perception has historically deterred some investors, who view emerging market sovereign issuers as inherently unstable and unpredictable.

Reality: Emerging markets are increasingly fiscally competent and economically healthy

Emerging markets have come a long way. Indeed, many of them enjoy better fiscal positions than developed markets. During the Covid-19 crisis, several emerging market central banks acted decisively by raising interest rates early to combat inflation. This allowed them to cut interest rates ahead of developed markets, having built up a “cushion” of real inflation-adjusted rates that allowed them to support economic growth while preserving financial stability. The economic health of emerging markets is indicated by their fiscal deficits and debt-to-GDP ratios, both of which are preferable to those of developed markets (Exhibit 3). In addition, emerging market economies are growing faster than developed markets, and the gap seems to have increased in recent years. Far from slowing down, we believe that emerging markets may be accelerating faster than their developed market peers.

Exhibit 3: Emerging market sovereigns have lower fiscal deficits and debt ratios than developed markets

Source: Allianz Global Investors, IMF World Economic Outlook (WEO), as of January 2025. Note for right-hand side chart: emerging market (EM) and developed market (DM) debt as % of GDP. Based on WEO data with JP Morgan EMBIG weights for the EM average and simple average for DMs of US, UK, Eurozone and Japan.

We think it is time to reevaluate emerging market debt

Emerging market debt has undergone a profound transformation over the last 30 years, yet perceptions among some investors have not caught up. Early crises and defaults in the 1990s cast a long shadow, but many emerging economies have made great strides in strengthening their policy frameworks and institutional resilience. They have built more diversified economies, deepened their local debt markets and improved communication and relations with international investors. This progress was evident during the Covid-19 crisis, when several emerging markets responded with agility and effectiveness.

In our opinion, both our macroeconomic analysis and rating agencies’ credit assessments confirm an improvement in emerging market economic fundamentals. Since 2023, emerging markets are more likely to have had their credit ratings upgraded than downgraded (Exhibit 4). The asset class – as captured in the JP Morgan EMBIGD Index – is now, on average, rated investment grade, which provides another source of support.

We expect more investors will turn to this asset class, which we argue should be a strategic component of any asset allocation because of its potential to provide diversified alpha and compelling risk-adjusted returns.

Exhibit 4: Emerging markets’ credit profiles are improving

Source: Allianz Global Investors, Bank of America Research as of January 2025.

1Source: Allianz Global Investors, IMF World Economic Outlook, as at April 2025.

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
    The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement.
    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances arises from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).
    AdMaster: 4779745

Recent insights

Navigating Rates

Improvements in fiscal competence and policymaking are transforming perceptions of emerging market debt.

Discover more

Embracing Disruption

The video games industry is reaching a level of maturity and market significance that makes it impossible for equity investors to ignore.

Discover more

Navigating Rates

Bond markets have gone from strength to strength following the August speech at Jackson Hole by US Federal Reserve Chair Jerome Powell. Largely received as a clear policy easing signal, Powell’s speech seemed to suggest that the balance of risk had now shifted from inflation to employment and growth.

Discover more

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.