Historically, global shocks have not been kind to emerging markets, given risk-off sentiment and their vulnerability to fluctuations in cross-border capital flows. However, despite the timeless warning from Sir John Templeton—who described “This time is different” as the four most dangerous words in investing—the turbulence caused by the global energy shock resulting from the war involving the United States, Israel, and Iran found emerging-market assets, as an asset class, in a stronger position. And the market is taking notice.
“Global fixed-income markets have experienced a sharp increase in volatility as the significant rise in energy prices and geopolitical uncertainty triggered a rapid repricing of inflation risks, leading to higher yields and a flattening of yield curves,” said Álvaro Peró, Chief Investment Officer for Fixed Income at Capital Group, in a recent market commentary.
Despite this environment, emerging market debt has remained relatively resilient. Even after the successive shocks of Liberation Day 2025—when President Donald Trump announced a sweeping package of tariff increases affecting all countries—and the ongoing conflict in the Middle East, emerging-market bonds have held up comparatively well.
From early April of last year through early May this year, Vontobel noted that local-currency emerging-market fixed income outperformed the Global Aggregate Index by more than 11% (all measured in U.S. dollars). At the same time, hard-currency sovereign bonds generated returns more than 9% above the global benchmark. These markets, the asset manager highlighted, “have demonstrated remarkable stability, with no dramatic capital outflows or free-falling local currencies.”
A Story of Resilience
According to Vontobel’s team—based on a report authored by Jean-Louis Nakamura, Thomas Schaffner, and Raphael Lüscher for equities, and Adrian Bender for fixed income—the traditional narrative surrounding emerging markets no longer reflects reality.
If the old view of weak markets vulnerable to capital flows and commodity cycles were still accurate, they argued, the asset class would have been severely impacted by recent events. Instead, what they see is “a level of structural resilience that would have been unimaginable” in the past.
“Many emerging markets have undergone a fundamental transformation over the past decade: fiscal positions have strengthened, monetary frameworks have become more credible, corporate governance has improved, and dependence on domestic demand and trade with other emerging-market partners has increased. At the same time, these economies have taken leadership positions in many of the winning themes of an increasingly bifurcated global economy,” the Vontobel professionals stated.
This transformation, they concluded, has laid the foundations for the current resilience and explains “the way these markets have weathered recent crises that would previously have been highly destabilizing.”
Strong Prospects for Emerging Market Debt
Looking ahead, investment firms generally see a favorable environment for emerging-market fixed income.
Against a global backdrop in which major central banks—the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan—are adjusting their monetary policy approaches, Capital Group sees encouraging signs within the asset class.
“We identify selective value opportunities in high-quality local-currency emerging-market debt with solid fundamentals and attractive real yields,” said Peró, adding that the firm also sees appeal in “certain emerging-market currencies that benefit from favorable terms-of-trade dynamics.”
Meanwhile, the fixed-income team at Neuberger Berman noted that while short-term risks remain significant, the long-term opportunity is still compelling. “We believe the substantial upward adjustment in emerging-market debt yields, cheaper currencies, and generally strong starting fundamentals support a positive medium-term total return outlook, with particularly attractive upside potential once the current crisis begins to move toward resolution,” they commented.
That said, in a global environment where geopolitical risks have produced very different outcomes across countries, prospects within the emerging-market universe remain highly diverse.
The Latin American Case
According to the asset manager, as the conflict in the Middle East drags on, the primary downside risk comes from the indirect effects of the oil shock on inflation and growth. “For emerging markets, which have been growing at an annual pace of around 4%, the threshold for a truly negative scenario remains high, but performance dispersion could be significant,” the firm stated in a recent market commentary.
Given the current inflationary risk environment, Neuberger Berman views Latin American markets as relatively well protected compared with other emerging regions. This is due, they explained, “to their exposure to commodities and energy, as well as their geographic distance from the conflict.”
Brazil is of particular interest to the firm. “The combination of a monetary easing cycle, supportive commodity-price trends, and attractive valuations could create an asymmetric opportunity,” they noted.
This view is complemented by Mexico, given the benefits that the U.S.-driven nearshoring trend—accelerated by tensions with China—could bring to the Mexican economy.
