Photo Emanuele Del Monte © Eurizon

By Emanuele Del Monte, senior portfolio manager at Eurizon

Over the past few years, the fundamentals of many emerging economies have improved markedly. Better external balances, higher foreign exchange reserves and continued prudent monetary policies are underpinning macroeconomic stability. Commodity exporters, in particular, are benefiting from resilient terms of trade, while certain Asian exporters of technology and energy remain key growth engines.

At the same time, the global backdrop remains broadly supportive of capital flows into emerging markets: a moderately weaker US dollar and the prospect of stable or slightly lower US rates are providing tailwinds for both bonds and equities. That said, geopolitical risks have intensified — conflicts in the Middle East and volatile capital flows are increasing the likelihood of sharp market dislocations.

From Brazil to South Africa: where do opportunities lie in emerging-market bonds?

Emerging-market bonds could continue to outperform their developed-market counterparts in 2026, in a scenario shaped by a weaker US dollar and stable or declining US yields — both of which support the asset class. Opportunities are not evenly distributed, however. Local-currency debt offers the strongest upside potential, combining high real yields (300–500 basis points) with undervalued currencies such as the Brazilian real, the Mexican peso and the South African rand. In several markets, inflation now under control gives central banks room to deliver modest rate cuts.

External debt is more of a carry story, with selective value in high-yield sovereign bonds where spreads still overprice default risk. Among the more compelling opportunities are domestic rates markets in Latin America and South Africa, as well as certain frontier-market external debt issuers, notably Argentina and Ecuador.

Currencies under pressure: caution warranted

The principal downside risks include a renewed acceleration in US inflation and a cautious Federal Reserve, either of which would strengthen the dollar and tighten global liquidity. Geopolitical tensions and volatile capital flows add a further layer of uncertainty.

The highest structural risks remain concentrated in countries with low reserves and heavy external financing needs — notably frontier economies across Sub-Saharan Africa, Pakistan and Egypt — as well as in domestic markets where policy credibility is fragile, such as Turkey and Nigeria, and where the foreign exchange market becomes the primary adjustment channel. South Africa, mentioned earlier as an opportunity, warrants a distinction here: its rates market offers value, but its currency remains exposed to fiscal slippage and political constraints, a tension investors should price carefully. More broadly, fiscal dynamics are deteriorating across parts of Latin America and the CEEMEA region, where debt trajectories are worsening against a backdrop of limited political room for manoeuvre.

The fundamentals of many emerging markets remain solid and structural opportunities persist. Yet the risk environment has deteriorated, driven by geopolitical tensions and episodic capital flow volatility. A selective approach is warranted — capturing local-market opportunities in a targeted manner while maintaining adequate portfolio hedges against tail risks.

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