May 26, 2026 | Podcast
The Active Share Podcast
The Active Share Podcast
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Emerging markets (EM) debt has evolved from a niche corner of global fixed income into a broad, increasingly resilient asset class. In this episode of The Active Share, Hugo is joined by Marcelo Assalin, CFA, partner, portfolio manager and head of William Blair’s EM debt team, to reflect on how EM debt—and his own investment approach—have matured over the years. Together, Hugo and Marcelo discuss the expanding opportunity set in frontier markets, common misconceptions around risk and EM debt, and why today’s macro backdrop may be more supportive than many investors assume.
Comments are edited excerpts from our podcast, which you can listen to in full below.
Marcelo Assalin: I grew up in Brazil, which was scary and unstable at times. But it was also exciting. I lived through just about every crisis you can imagine—debt, currency, financial, political, energy, even presidential impeachments. But it was an evolving environment, especially during the transition from military rule to democracy.
That instability, and living through those experiences, built a lot of resilience in how I view EMs, how I assess risk, and how I approach investing.
I started my career in Brazil in 1994, when EM debt was just emerging. The asset class really came out of the securitization of defaulted commercial loans in the late ’80s through the Brady Plan. And at the time, the universe was tiny, maybe 10 or 12 countries and around 30 bonds. I could fit everything on a notepad and tracked prices manually each day.
Today, it’s completely different. The universe spans nearly 100 countries, with more than 900 issuers and thousands of bonds across both local and hard currency markets.
Marcelo: Those investing skills have evolved as well. The EM universe has a high degree of idiosyncratic risk. It’s large, and there’s always something happening somewhere in the world.
Because of that, it’s critical to approach the asset class with a strong focus on diversification. That’s really the backbone of my investment philosophy; you don’t want to concentrate too much in just a few places.
Today, we can build much more diversified portfolios, reduce exposure to specific risks, and avoid concentration. In our view, that’s essential for achieving long-term consistency and success in EMs.
Marcelo: At a high level, EM debt refers to fixed-income securities issued by EM countries and companies. That includes sovereign debt, as well as corporate debt from companies based in EM countries. These securities can be issued in hard currencies (predominantly U.S. dollars) but increasingly also in local currencies issued by the countries themselves.
It’s a very broad universe, and in total, across the indices we track, the market exceeds $5 trillion.
Each year, new countries enter the market as well. One area we’re particularly excited about is frontier markets, which are countries that are opening to international investors. We’re finding some potentially attractive opportunities within that space.
One area we’re particularly excited about is frontier markets.
Marcelo: The conventional approach is to look at the asset class through a regional lens and then think about positioning and security selection within those regions.
But we don’t believe that is optimal. Within a given region, you can have countries with very different risk profiles. Take Latin America, for example—Argentina and Chile offer very different risks and investment opportunities.
Instead, we segment the universe into risk buckets, based primarily on each country’s volatility. We then group countries into high-beta, medium-beta, and low-beta categories. That framework allows us to compare countries more effectively, manage risk more efficiently, and position portfolios in line with our broader top-down views.
Marcelo: At a high level, we focus on two things: a country’s ability to pay and its willingness to pay. Ability to pay comes down to macro fundamentals. Is the country generating enough hard currency to service its debt? How is growth evolving? What do fiscal dynamics look like, and how are they affecting debt levels?
That’s the traditional macro framework. But equally important is willingness to pay. Some countries default even when they have the capacity to meet their obligations, often due to political factors. This is where governance comes in. We place strong emphasis on institutional strength such as how decisions are made, how stable the system is, and whether it’s improving or deteriorating over time.
One encouraging trend is that many EM countries have strengthened their institutional frameworks over the years, often with support from multilateral organizations and through structural reforms. Assessing that evolution, alongside macro fundamentals, is critical.
Marcelo: It’s very important, especially in frontier markets, as information can be limited and transparency isn’t always there. Being on the ground and talking to local investors, policymakers, and officials gives you a much better sense of what’s really happening.
We do that frequently, and our research team is constantly on the ground. And within the team, we have a bit of competition. I’m still in the 70s in terms of number of countries visited, while some of my colleagues are already above 100.
Marcelo: Yes. Back in 1995 when I was a securities trader, I was trading bearer bonds, which are bonds where whoever physically holds it owns it. These bonds came out of Brazil’s agrarian reform, when the government compensated landowners with bearer bonds, and a secondary market developed.
I remember one situation where I sold bonds to an investor in Rio de Janeiro, and there was no one available to deliver them. So, I had to fly from São Paulo to Rio de Janeiro with a suitcase carrying millions of dollars’ worth of bearer bonds.
Experiences like that build resilience, and you become very aware of the risks you’re taking.
I had to fly from São Paulo to Rio de Janeiro with a suitcase carrying millions of dollars’ worth of bearer bonds. Experiences like that build resilience.
Marcelo: One area where we’ve developed strong expertise is navigating distressed EM debt. There can be compelling opportunities there. Just a few years ago, there were several trading at distressed levels.
Investing in underperforming countries clearly comes with risks, but also meaningful upside. If you look at EM sovereign debt over the past 30 years, average recovery values in default situations have been around $0.55 on the dollar.[1]
When a country runs into trouble and stops paying, bond prices often fall sharply (sometimes into the low 20s), partly because many investors are forced to sell. That dislocation can create opportunity.
Key questions to consider are how investor-friendly the restructuring will be and how long it will take. For example, Ukraine’s 2015 restructuring was relatively quick and delivered strong recoveries, while Argentina’s process stretched over a decade.
So, it ultimately comes down to where you invest, the price you pay, the expected recovery, and the time horizon. But in many cases, we see opportunities rather than just risk, and we’re comfortable operating in that part of the market.
Marcelo: When we invested in Venezuelan bonds, they were trading around $0.10 on the dollar. At the time, we were quite skeptical about the timeline for any potential restructuring.
But at that level, the upside was significant. We decided to accumulate bonds in the portfolio. Fortunately, recent developments accelerated the situation and opened a window for a restructuring process to happen sooner. And as that outlook improved, bond prices rallied sharply. Today, however, they’re trading at levels where investors should be more cautious because the risks are still very much there.
Marcelo: Yes. For example, during recent Middle East tensions, EM credit spreads have been better behaved than in developed markets (DMs). EM currencies have also outperformed DM currencies even as the U.S. dollar strengthened, and local interest rates in EMs have adjusted less than in developed economies. That speaks to the resilience of the asset class.
Growth has been relatively strong as well. Even when concerns around global trade picked up—such as when U.S. tariffs increased—EMs held up well. Today, a large share of EM trade is within EMs, which helps reduce reliance on DMs.
Fiscal dynamics have also improved, with many EM countries operating at more stable and often lower levels of debt than advanced economies. In many cases, they’re running strong balance of payments and maintaining a surplus of dollars.
And at the same time, the asset class itself has become much more diversified, and the idea that EM debt is just a commodity play is outdated. You now have a wide range of economic models, from fintech expansion in Latin America, to telecom companies in Africa moving into financial services and providing access to underbanked populations, and to the growth of the tech sector in Asia.
But while EMs have become more diversified, more resilient, and less dependent on developed economies, there’s still a disconnect between how the asset class performs and how it’s often perceived in terms of risk.
Marcelo: China remains critical from a financial and trade perspective as it’s the largest EM country and the biggest trading partner for many EM economies. That said, from an investment standpoint within EM debt, it’s a different story.
China is a highly rated country with low interest rates and tight credit spreads, which makes it less attractive relative to other opportunities in EM debt. We tend to find more compelling valuations elsewhere in the universe.
And on the growth and trade front, recent years have shown that while China is slowing, the broader EM world continues to grow. The linkages are real, but the level of dependence is often overstated.
There’s still a disconnect between how EM debt performs and how it’s often perceived in terms of risk.
Marcelo: They have very different economic models. China has been more export-oriented, while India is more driven by domestic demand.
In that sense, they tend to complement each other rather than compete directly, and I don’t see both crowding out opportunities in the broader EM universe. Other EM countries can still find their place and continue to generate opportunities.
Marcelo: We’re particularly excited about opportunities in the frontier space, where we believe the risk premia are very attractive relative to the risks. India is a good example. The country opened to fixed-income investors a few years ago and saw significant inflows. Other EM countries are going through similar transitions such as Egypt and Nigeria as well.
But we’re especially focused on smaller, newer markets that have a combination of attractive currency valuations and high domestic interest rates: countries such as the Dominican Republic, Jamaica, Panama, and Costa Rica in Latin America and the Caribbean; Paraguay and Uruguay in South America; Zambia and Ghana in Sub-Saharan Africa; Kazakhstan, Uzbekistan, and other “stans” in Central Asia; and Sri Lanka in Asia, which recently went through a restructuring and implemented International Monetary Fund (IMF)-supported reforms.
Marcelo: In any environment, there are winners and losers. For example, some Gulf Cooperation Council (GCC) countries are currently being affected by conflict in the Middle East, while other countries in different regions are benefiting from higher energy prices. That’s the nature of a highly diversified universe—there are always opportunities because outcomes vary across countries.
More broadly, I do believe the Global South[2] has become more resilient over time, as economies grow together and reduce their dependence on advanced economies.
Marcelo: EM debt tends to offer higher yields, which is driven by the disconnect between risks and perceived risks. That translates into the potential for higher returns over time, as we’ve seen historically, and those returns generally compensate for the slightly higher volatility of the asset class.
At the same time, EM debt provides meaningful diversification benefits, not just across many countries, but also away from heavily concentrated dollar- and euro-denominated exposures that tend to be highly correlated with other parts of a portfolio.
From a credit perspective, long-term default rates in EM sovereign debt have historically been about half of what we see in DM corporate credit, and recovery values tend to be higher as well. That again speaks to the disconnect in perceived versus actual risk.
EM debt provides meaningful diversification benefits.
Marcelo: I believe the outlook is positive, and that things should improve over the next five years versus where we are today. Of course, risks will always be present and managing them is critical.
I remember in 2002, during the run-up to Brazil’s presidential election when Luiz Inácio Lula da Silva was elected, markets were extremely concerned. The cost to insure against default spiked to around 4,000 basis points (bps). But by the end of his first term, that same measure had fallen to below 150 bps. That experience taught me the importance of staying disciplined, and of separating noise from fundamentals.
And if you look at the past 30 years, there have only been a handful of times when the JP Morgan EMBI Global Diversified Index[3] fell more than 10%, and in each case, it recovered to new highs within a year.
The key takeaway is that investors should look through short-term volatility. EM debt has historically delivered significant value, and given where fundamentals are today, I believe that remains true going forward.
[1] Based on JP Morgan and IMF estimates of sovereign restructurings. [2] The “Global South” refers to developing or emerging economies across Latin America, Africa, Asia, and parts of the Middle East. [3] The JP Morgan EMBI Global Diversified Index is a widely used benchmark that tracks the performance of U.S. dollar–denominated government debt issued by EM countries.
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