Carlos Carranza, Senior Fund Manager at M&G Investments for local markets and Latin American sovereign debt, warned that the dollar is facing a process of structural diversification that could mark the end of 15 years of US exceptionalism. He also noted that flows into emerging market debt remained positive even during the onset of the war between Russia and Ukraine, contrary to all historical patterns.
“Since the war began, we have had net inflows into emerging market fixed income debt. That, to me, is quite surprising because historically, five, ten, or fifteen years ago, if you had a spike in volatility like the one we are experiencing now, you would normally see outflows from that asset class,” Carranza said during a presentation at the Leaders Summit, a professional event in Miami organized by Funds Society.
The manager—who has more than 21 years of experience in the industry and a track record at JP Morgan, Allianz Global Investors, and currently at M&G since October 2025—structured his analysis around two pillars: the factors weakening the dollar and the strengths of emerging markets themselves.
The dollar under pressure: five reasons
The first factor Carranza identified is the change in leadership at the US Federal Reserve (Fed). Jerome Powell, who led the institution for eight years through crises, high inflation, and periods of stability, will step down on May 15, handing over to Kevin Warsh. “We are moving from someone we know, who has led the Fed for eight years through multiple crises, to someone new as chairman. That simply adds more uncertainty,” he noted.
The second factor is the US midterm elections. Carranza presented a slide with data from the past 20 years showing that the party in power lost the midterms in every case, regardless of political affiliation. Since World War II, that pattern has repeated 90% of the time. For international investors, he noted, this may translate into greater institutional uncertainty and less coordination between the Executive and Congress.
The third reason is fiscal dynamics. US public debt as a share of GDP has risen from approximately 70% two decades ago to 122% כיום, with a deficit running at 6% of GDP. For this year, estimates point to net issuance of $2 trillion in Treasury bonds. Faced with that supply, Carranza outlined the logic of some investors: “Why not buy emerging market bonds instead of Treasuries? Why not buy Chile, a solid investment-grade credit yielding 200 basis points more and not issuing debt this year?”
The fourth factor is the geopolitical environment. Carranza listed a series of ongoing tensions: the debate over the Panama Canal, the conflict in Ukraine, negotiations over the USMCA—whose review will begin in the coming weeks—the conflict with Iran, and tariff volatility. On February 20, the US Supreme Court ruled that President Donald Trump cannot impose tariffs unilaterally. “There is a lot of research showing that perhaps new marginal savings in Europe are no longer being allocated 100% to US equities, as used to be the case,” he said.
The fifth element is the trend reversal in emerging market currencies. According to the index presented by Carranza, emerging market currencies appreciated against the dollar in 2024 for the first time after fifteen consecutive years of weakening, a period that began around 2010. “It could be the beginning of a reversal of fifteen years of US exceptionalism. Or not. But it could be,” he said.
Emerging markets with stronger fundamentals
In the second pillar of his analysis, Carranza contrasted the fiscal position of emerging markets with that of developed economies. While US debt-to-GDP has nearly doubled over two decades, the average across about 20 large emerging countries has increased by only 18 percentage points over the same period.
Another argument in favor of emerging markets is the discipline of their central banks. Brazil raised interest rates by 1,000 basis points before the Fed made its first 25-basis-point hike in the post-COVID cycle. Colombia surprised with a 100-basis-point increase just a few weeks ago. Chile adopted a restrictive stance following recent global events, and countries in Central and Eastern Europe are already anticipating hikes due to concerns about inflationary pressures. “The repricing and the speed at which emerging market central banks have reacted have been enormous and very fast,” Carranza said.
As a result of that discipline, average real rates in emerging markets stand at around 2.5%, providing room to maneuver in the face of a potential new round of inflationary risks stemming from oil prices.
Underpositioning and flow potential
Carranza also challenged the perception that investors are already overloaded with emerging market assets following last year’s strong performance. International holdings of local sovereign debt in emerging markets stand at around 16%, below the 23% level seen before the COVID-19 pandemic, according to central bank data.
The M&G manager concluded with a figure illustrating flow potential: the US pension fund industry manages around $6 trillion and allocates only 5% to non-US assets. An increase of just one percentage point would amount to $60 billion in inflows into emerging markets. “A fund in Minnesota, if it shifts 1%, implies hundreds of millions of dollars for a very under-owned asset,” he illustrated.
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