April 28, 2026 | Emerging Markets Debt
Portfolio Manager
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https://im.williamblair.com/investments/sicav-funds/lu2093691256-emerging-markets-debt-hard-currency-fund
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https://im.williamblair.com/investments/separate-accounts/emerging-markets-debt-hard-currency
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Despite elevated volatility tied to the Middle East conflict, EM debt held up well in the first quarter, with performance supported by steady growth, stable fiscal dynamics, and strong commodity prices.
Geopolitical risk increased sharply during the quarter, most notably with escalating U.S.-Israel-Iran tensions and the temporary closure of the Strait of Hormuz. While headline risk may continue to drive near-term volatility, we expect the situation to evolve over weeks rather than months, given strong incentives to de-escalate. Importantly, we do not view these developments as undermining the medium- to long-term investment case for EMs.
Against this backdrop, we believe the asset class remains fundamentally well positioned. Growth is expected to moderate but remain resilient, supported in part by commodity strength. External balances are a key area of stability, with sustained capital inflows, solid foreign direct investment, and generally healthy current account positions supporting balance-of-payments dynamics.
Technical conditions also remain constructive. Under-allocation to the asset class continues to drive pent-up demand, while relatively muted net issuance provides an additional tailwind.
Valuations have improved meaningfully following the recent widening in spreads. Yields remain favorable, real yields are compelling even after accounting for inflation, and currencies have adjusted to more favorable levels. Taken together, we believe this creates a supportive backdrop for renewed capital flows and attractive forward-looking return potential.
Periods of dislocation should present opportunities to selectively add risk at more attractive levels.
So, while we expect near-term volatility to persist, the combination of resilient fundamentals, supportive technicals, and improved valuations supports a positive medium-term outlook.
We reduced risk positioning ahead of the recent volatility. However, the ensuing market weakness is beginning to create more compelling entry points, and we expect to reallocate capital selectively in the coming weeks. Periods of dislocation should present opportunities to selectively add risk at more compelling levels.
Below, we break down some of our largest active hard-currency positions in each beta bucket.
To allocate capital and budget risk effectively across a large and diverse set of countries, we use a proprietary grouping framework.
Rather than organizing by region, we classify issuers into low-, medium-, and high‑beta buckets. We believe this approach captures true risk profiles given the wide range of development levels within regions and allows for fairer comparisons and more optimal portfolio construction.
Risk budgets are allocated dynamically: When our top‑down scores are more positive, we increase exposure to high‑beta countries. Portfolio‑level exposure is monitored and adjusted continuously to maintain an optimal risk/return balance.
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Source: William Blair, as of March 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.
The largest overweight positions on a spread duration basis were in Ecuador, Argentina, and Suriname. Conversely, the largest underweight positions were in Ivory Coast, Egypt, and Kenya.
Ecuador (overweight): Elevated oil prices should support Ecuador’s external and fiscal accounts and boost economic growth.
Argentina (overweight): We believe the country is on a positive fundamental trajectory following mid-term election results and current policy direction.
Suriname (overweight): The completion of the 2023 debt restructuring under the International Monetary Fund (IMF) program and the introduction of new fiscal rules have materially strengthened the country’s policy framework. We see improving fundamentals, attractive carry, and supportive relative valuations.
Heightened regional geopolitical tensions warrant caution in Egypt.
Ivory Coast (underweight): While macro fundamentals remain relatively strong within Sub-Saharan Africa and the October 2025 election outcome reduced near-term political risk, spreads compressed meaningfully and offered limited compensation relative to peers in the first quarter.
Egypt (underweight): While reform momentum and Gulf funding have eased near-term balance-of-payments pressures, Egypt remains exposed to execution risk, has elevated external financing needs, and is sensitive to global funding conditions and energy prices. Heightened regional geopolitical tensions (including Egypt’s proximity to the Iran conflict and key shipping routes) and valuations that have rerated on reform optimism leave room for continued underperformance, and this warrants caution.
Kenya (underweight): While growth remains resilient and external buffers are adequate in the near term, political constraints ahead of the 2027 election cycle limit the scope for meaningful fiscal adjustment. The 2026 fiscal plan signals continued reliance on nontraditional financing amid elevated debt servicing costs and tight domestic liquidity. Against this backdrop, demanding valuations—combined with exposure to Gulf supply chain disruptions and rising energy prices—support a more defensive stance.
The largest overweight positions on a spread duration basis were in Mexico, Colombia, and Trinidad and Tobago. Conversely, the largest underweight positions were in Panama, Dominican Republic, and South Africa.
Mexico (overweight): The Mexican sovereign has compelling valuation, and we believe Pemex is well supported by the sovereign and offers very attractive valuations relative to sovereign bonds. We also like corporate bonds in utilities and financials.
Colombia (overweight): The country’s terms of trade continue to improve, and valuations remain appealing, particularly in longer-dated bonds.
Trinidad and Tobago (overweight): The country holds significant wealth in its Heritage and Stabilization Fund and continues to benefit from elevated oil and gas prices. Valuations are also attractive relative to peers.
Panama (underweight): Valuations appear rich relative to fundamentals. Spreads have tightened, leaving limited room for further compression absent a meaningful improvement in the fiscal outlook.
Dominican Republic (underweight): The country is a large net oil importer, and higher oil prices are likely to strain fiscal accounts, particularly as fuel subsidies expand to shield consumers from price increases.
South Africa (underweight): Strong post-election performance and sustained inflows have compressed spreads to levels that appear rich relative to peers and the country’s medium-term growth and fiscal profile. As a result, valuation upside appears limited despite improving policy credibility.
The largest overweight positions on a spread duration basis were in Paraguay, Oman, and Hungary. Conversely, the largest underweight positions were in Saudi Arabia, Malaysia, and United Arab Emirates (UAE).
Paraguay (overweight): The country’s debt-to-GDP ratio remains low, and it has a strong track record of low fiscal deficits. S&P upgraded Paraguay to investment-grade status in December 2025. Valuations are also attractive relative to low-beta peers.
Oman (overweight): We believe the sovereign’s improving credit profile is supported by prudent fiscal management and ongoing debt reduction. Despite recent oil-price volatility, policy settings remain conservative, with budget assumptions and medium-term plans focused on balance sheet resilience rather than procyclical spending. Progress on structural reforms and liability management has further strengthened fundamentals, while valuations continue to offer a defensive carry profile relative to regional peers.
Hungary (overweight): While macroeconomic adjustment and disinflation have improved policy credibility, we were mindful of the potentially binary outcome of the election (in which Péter Magyar, leader of the Tisza party, ultimately unseated Viktor Orbán).
In Saudi Arabia, elevated regional tensions, particularly related to Iran, heighten exposure to episodic risk premia.
Saudi Arabia (underweight): Elevated regional tensions, particularly related to Iran, heighten exposure to episodic risk premia through energy markets, shipping lanes, and regional security dynamics, even if direct macro spillovers remain contained.
Malaysia (underweight): Sovereign bond valuations are tight, but we have selective overweight exposure to quasi-sovereign bonds, which we believe offering more attractive valuations.
UAE (underweight): Although the UAE benefits from robust diversification, strong fiscal buffers, and policy credibility, heightened regional tensions linked to the Iran conflict could weigh on investor sentiment and increase volatility given the country’s role as a regional financial and trade hub. With limited valuation cushion at the sovereign level, we prefer targeted exposure where risk-adjusted return potential is more compelling.
Marco Ruijer, CFA, is a portfolio manager on William Blair’s emerging markets debt team.
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