Country-specific fundamentals, rather than broad regional trends, drove investment opportunities across local currency emerging markets (EMs) in the second quarter.
Attractive real yields and supportive macroeconomic conditions continued to create opportunities in select local rates and currencies.
We sought to balance opportunities in markets showing improving fundamentals with caution in markets facing fiscal, political or geopolitical uncertainty.
As market sentiment improved in the second quarter, opportunities in local currency EM debt became increasingly driven by country-specific fundamentals rather than broad macro risks.
Local currency EM debt delivered positive returns in the second quarter, with the J.P. Morgan GBI-EM Global Diversified[1] advancing 3.85%. Currency moves contributed 0.54% to performance, while index yields tightened by 27 basis points, providing an additional tailwind. By region, Africa led performance, followed by Latin America, Europe, and Asia.
To effectively allocate capital and budget risk across a large and diverse group of countries, we employ a proprietary grouping methodology. Countries are each assigned a beta bucket based on market beta and local capital-market considerations. Liquid markets are classified as high or low beta, and less-liquid, idiosyncratically risky countries are assigned a frontier grouping. This enables us to make relative value and asset-allocation decisions according to risk profile rather than by region or other common characteristics.
Beta-Bucket Approach: Top Exposures
Source: William Blair, as of June 30, 2026. Beta buckets are based on the team’s qualitative and quantitative analysis. Risk buckets are provided for illustrative purposes only and are not intended as investment advice or as projections of future returns. Overweights/underweights may vary between vehicles.
Low-Beta Bucket
In the low-beta bucket, country positioning reflected a selective approach across rates and currencies, with portfolio decisions shaped by differences in inflation, monetary policy, valuations, external vulnerabilities, and domestic growth. We added risk where improving fundamentals and relative value created opportunities, while maintaining more cautious positions in markets facing weak carry, elevated financing needs, or persistent macroeconomic uncertainty.
Poland: We have shifted from an underweight to an overweight position in rates. The Polish central bank has adopted a more dovish bias as oil prices have declined, increasing the likelihood that the next policy move will be a rate cut. Inflation has steadily moderated over the past several months, and we believe Polish duration offers compelling relative value compared with Hungary, where yields have fallen sharply since the election.
Malaysia shows resilience to external shocks and relatively strong energy security.
Malaysia: We maintained a long position in duration during the quarter, reflecting our view that the economy’s resilience to external shocks and relatively strong energy security would support a faster and more sustained recovery in asset prices.
South Korea: The five-year receiver position, which benefits when interest rates decline, serves as a macro hedge by partly offsetting the portfolio’s overall duration underweight stemming from its low-beta Asia exposure.
China: We unwound our overweight position in the Chinese renminbi after it rallied nearly 3% against the U.S. dollar year-to-date. We maintain a meaningful short-duration position in rates, reflecting our cautious view of Chinese government bonds—particularly at the long end of the yield curve—given low yields, limited carry, and recent anti-involution policies aimed at mitigating deflationary risks.
India: We maintained a short-duration position during the quarter, although we reduced its size. The Reserve Bank of India has pushed back against near-term rate hikes due to concerns about their impact on economic growth, but the possibility of tightening remains given inflation risks associated with El Niño. Meanwhile, the fund added a curve-flattening position by closing its short-duration position at the long end of the yield curve, as additional long-dated bonds became eligible for the Fully Accessible Route, improving market accessibility for foreign investors.
In Thailand, global geopolitical spillovers weigh on an already fragile domestic growth outlook.
Thailand: We remain underweight duration given unappealing valuations, although lower oil prices following the temporary second-quarter ceasefire between the United States and Iran eased pressure on the economy. That said, we expect financial markets to remain under pressure as global geopolitical spillovers continue to weigh on an already fragile domestic growth outlook.
Czech Republic: We maintain an overweight position in the Czech koruna. The Czech central bank has retained its hawkish bias and kept interest rates elevated, including raising the policy rate to 3.75% in June. The economy remains resilient, with industrial and manufacturing activity gaining momentum, while strong fundamentals continue to support the koruna.
Romania: We remain underweight the leu as structural external vulnerabilities persist. The central bank has allowed some currency weakness following the collapse of the governing coalition, while execution risks remain elevated amid substantial financing needs and persistently high inflation.
High-Beta Bucket
Across our high-beta bucket, positioning remained selective as attractive carry and real yields competed with election uncertainty, fiscal pressures, inflation risks, and geopolitical volatility. We favored markets where valuations and policy credibility offered compelling opportunities, while maintaining more cautious positions where weaker growth, governance concerns, or narrowing rate differentials reduced the risk/reward potential.
Colombia: We remain overweight rates given attractive valuations and our view that the yield curve is pricing in excessive monetary tightening. We believe fiscal improvement following the election should bolster investor confidence, anchor inflation expectations, and support a lower term premium at the long end of the yield curve. We reduced our exposure to the Colombian peso ahead of the election because of the binary outcome and significant downside risk, instead expressing the position through foreign exchange options. This allowed us to participate in the currency’s strong recent rally while limiting downside risk.
Brazil: We are overweight both rates and the Brazilian real. Fiscal concerns have increased ahead of the October elections, while inflation has picked up recently. However, Brazil continues to offer one of the highest real interest rates in the benchmark. Although near-term volatility is likely ahead of the election, we believe attractive real yields and well-anchored long-term inflation expectations should support portfolio inflows once the election uncertainty subsides.
We believe the Turkish lira’s high carry adequately compensates investors for devaluation risk.
Turkey: We continue to believe the Turkish lira’s high carry adequately compensates investors for devaluation risk and that the central bank can maintain a controlled depreciation of the currency. This view strengthened during the quarter as lower energy prices and improved risk sentiment supported the carry trade. We also gradually increased duration, as our confidence grew that Turkey can resume its disinflationary path.
Indonesia: We are underweight both rates and the Indonesian rupiah amid higher domestic financing costs, slowing growth, a widening fiscal deficit, governance concerns, increased bond supply, and external pressures from volatile global energy prices driven by geopolitical tensions in the Middle East.
South Africa: We maintain an underweight position in South African rates. The rand experienced elevated volatility during the quarter as global risk sentiment fluctuated in response to developments in the Middle East. Although the medium-term growth outlook has improved, the central bank has revised its inflation forecasts higher, positioning remains crowded and recent political developments have added to uncertainty.
Mexico: We remain underweight the Mexican peso, reflecting weaker growth dynamics and narrowing interest-rate differentials with the United States. Banxico has continued to highlight downside risks to Mexico’s economic growth. We remain overweight Pemex bonds as increased government support should help compress their spreads relative to Mexican sovereign bonds.
Frontier Bucket
Across frontier markets, we remained constructive where high real yields, attractive carry, and improving macroeconomic fundamentals appear to offer sufficient compensation for risk. Stronger reserve positions, reform momentum, fiscal discipline, and favorable external balances supported select local rates and currencies, in our opinion, even as geopolitical volatility and country-specific risks reinforced the need for careful positioning.
Zambia: We remain overweight local rates, supported by strong macroeconomic fundamentals, continued disinflation, and favorable terms of trade, as well as improving output of key export commodities. During the first quarter, Zambia proved relatively resilient despite the Iran-related shock, benefiting from attractive real yields, supportive carry, and improved investor confidence in fiscal discipline and debt sustainability. We believe further yield-curve compression should support the position.
Uganda: We remain constructive on local assets. The second quarter was marked by an election that delivered political continuity and a budget aimed at supporting stronger growth, alongside strong foreign exchange reserves and continued progress toward renewed International Monetary Fund (IMF) engagement. Long-dated bonds continue to offer attractive real yields, while oil-related foreign direct investment inflows and solid reserve buffers underpin our positive view on the Ugandan shilling despite heightened global volatility. Although legislation passed during the quarter raised some concerns, it has not been sufficient to derail the decline in currency volatility.
Kenya: We maintain an overweight position in local rates, where yields continue to provide adequate compensation for macroeconomic and fiscal risks. Although the Iran-related conflict increased market volatility by weakening global risk sentiment, attractive carry and the potential for gradual macroeconomic stabilization continue to support selective exposure to Kenyan duration, particularly as the country benefits from lower energy prices and high real yields.
Nigeria: We believe the carry trade remains well supported by naira stability, elevated oil exports, high interest rates, and historically strong foreign exchange reserves. Although the naira is one of the more crowded trades in frontier markets, we believe strong fundamentals should continue to support attractive returns in the months ahead.
Egypt: We remain overweight the Egyptian pound, supported by high carry, improved foreign exchange valuations, and cleaner positioning following recent de-risking. With IMF-backed reforms remaining on track and external financing support in place, we believe the recent currency adjustment has created a more attractive risk/reward profile. Continued support from Middle Eastern partners and the implementation of more market-friendly economic policies further reinforce our constructive outlook.
Lewis Jones, CFA, FRM is a portfolio manager on William Blair's emerging markets debt team.
[1]The J.P. Morgan GBI-EM Global Diversified Index tracks fixed-rate, local-currency government bonds issued by EM countries and accessible to international investors, with country weights capped to limit concentration.
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