August 5, 2026 | Emerging Markets Debt
Portfolio Manager
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Despite geopolitical uncertainty during much of the second quarter, emerging markets (EM) hard currency debt delivered strong returns as improving risk sentiment, easing inflation concerns, and resilient economic fundamentals supported the asset class.
Geopolitical developments continued to drive uncertainty in EMs during the quarter. Although conditions improved as conflict in the Middle East began to de-escalate and oil prices retreated from their April highs, re-escalating tensions since quarter-end underscore the potential for such developments to remain important market drivers. Still, resilient economic growth and stable macroeconomic conditions helped support EMs through the period of uncertainty.
Against this backdrop, we believe the asset class remains fundamentally well positioned. Economic growth has remained resilient across much of the EM universe, while healthy external balances, sustained foreign direct investment, and generally stable current account positions have continued to support the outlook. Although inflation has proven somewhat sticky, many central banks remain in a position to maintain a patient policy stance.
Technical conditions also remain favorable. We believe continued investor under-allocation to EMs could support inflows, while subdued net issuance could provide an additional tailwind.
Although credit spreads have compressed following strong performance during the quarter, valuations remain attractive. Absolute yields have offered compelling opportunities, particularly for active investors able to identify value across countries and sectors.
While periods of volatility are likely to continue given the evolving geopolitical and macroeconomic backdrop, we remain constructive on hard currency EM debt.
Below, we break down some of our largest active hard-currency positions in each beta bucket.
With the aim of allocating 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.
Source: William Blair, as of June 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.
High-beta markets continued to offer a wide range of opportunities in the second quarter, but performance and valuations varied meaningfully across countries. We remain selective, favoring markets where improving fundamentals and attractive valuations support the outlook, while maintaining a more defensive stance where fiscal pressures, crowded positioning, or high valuations limit upside potential.
Argentina (overweight): We remain overweight Argentina but maintain a defensive posture in security selection, with a preference for amortizing bonds. We also hold positions in the Province of Buenos Aires and gross domestic product (GDP) warrants. Overall, we believe Argentina remains on a positive fundamental trajectory, supported by continued fiscal discipline and ongoing reserve accumulation by the central bank.
Ivory Coast (overweight): We moved to an overweight position based on valuations, as spreads tightened less than those of several sub-Saharan African peers during the second quarter, despite the country’s relatively strong macroeconomic fundamentals.
El Salvador (overweight): Our overweight position reflects strong fiscal adjustment and manageable financing needs. Further progress on pension reform and resolving outstanding International Monetary Fund concerns over government bitcoin purchases could support a ratings upgrade.
Kenya (underweight): We remain underweight sovereign credit given persistent fiscal pressures and limited progress toward durable consolidation. The 2026 medium-term fiscal plan points to continued reliance on nontraditional financing tools amid elevated debt-service costs and tight domestic liquidity. While growth remains resilient and external buffers appear adequate in the near term, political constraints ahead of the 2027 election cycle reduce the likelihood of meaningful fiscal adjustment. Combined with demanding valuations, vulnerabilities related to Gulf supply chains and higher energy prices support a defensive stance.
Nigeria (underweight): Nigeria benefited significantly from the Middle East conflict, as spreads tightened to reflect the positive impact of higher oil prices on the economy. However, we believe valuations have become too tight and could be vulnerable to near-term profit-taking as oil prices have declined and investor positioning remains heavy.
Pakistan (underweight): We maintain an overweight cash position concentrated at the short end of Pakistan’s U.S. dollar sovereign curve, where we see attractive carry with relatively low volatility. At the same time, we remain underweight spread duration, with no exposure to longer-duration bonds given expensive valuations.
Medium-beta markets present a mixed opportunity set, with attractive value in countries where policy improvement, political normalization, or sovereign support strengthen the investment case. At the same time, strong performance has left valuations stretched in some markets, reinforcing the importance of selectivity across sovereign and corporate credit.
Mexico (overweight): We remain overweight Pemex, which we believe benefits from strong sovereign support and offers attractive valuations relative to Mexican sovereign bonds. We are also overweight the sovereign based on valuations and maintain positions in utility and financial corporate bonds.
Romania (overweight): We believe the market is overly concerned about further political deterioration and expect a coalition government to be formed before year-end. Although the collapse of the most recent government has created some lingering political uncertainty, we expect the parties to reach a compromise.
Colombia (overweight): We expect more orthodox policies under the new government. Valuations remain attractive, particularly among longer-dated bonds. We also hold positions in utility corporate bonds and subordinated bank securities.
Costa Rica (underweight): We believe sovereign bonds are overvalued, although we acknowledge the country’s positive fundamental trajectory. We also hold a corporate bond in the telecommunications sector.
Dominican Republic (underweight): Despite the recent approval of fiscal reforms, resilient economic growth, and strong tourism activity, valuations remain unattractive to us.
South Africa (underweight): Strong post-election performance and sustained inflows have compressed spreads to levels that appear stretched relative to peers and the country’s medium-term growth and fiscal challenges. Despite improving policy credibility, we believe further valuation upside is limited.
Low-beta markets continue to offer selective opportunities, but tight sovereign valuations across several countries reinforce the importance of relative-value positioning. We favor markets where strong fundamentals are paired with attractive valuations, while seeking opportunities in corporate and quasi-sovereign debt where they offer better risk-adjusted return potential than sovereign bonds.
Paraguay (overweight): We find valuations attractive relative to low-beta peers; Paraguay also has solid fundamentals, in our opinion. Although there has been some recent fiscal slippage, the country’s debt-to-GDP ratio remains low, and Paraguay has a strong track record of maintaining modest fiscal deficits.
Oman (overweight): We believe the sovereign’s improving credit profile remains supported by prudent fiscal management and continued debt reduction. Despite recent oil price volatility, policy remains 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 credit fundamentals, while valuations continue to offer defensive carry relative to regional peers.
UAE (overweight): Our exposure remains selective. We reduced positions in corporate credit and remain cautious on sovereign risk given compressed valuations. Although the UAE benefits from economic diversification, strong fiscal buffers, and policy credibility, heightened regional tensions tied 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 in sovereign debt, we prefer targeted exposure where risk-adjusted returns remain more compelling.
Chile (underweight): Valuations are tight and subdued economic growth is expected, but fundamentals remain strong, so we have exposure through selecting corporate positions.
Malaysia (underweight): Our underweight to Malaysian sovereign bonds is based on tight valuations, but we maintain selective overweight exposure to quasi-sovereign bonds that offer more attractive valuations than comparable sovereign bonds in the index.
China (underweight): We remain underweight Chinese sovereign and quasi-sovereign bonds given tight valuations, but maintain selective overweight exposure to corporate bonds that offer more attractive valuations and potential for spread compression as credit fundamentals improve.
Marco Ruijer, CFA, is a portfolio manager on William Blair’s emerging markets debt team.
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