Photo by 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 significantly. Better external balances, higher foreign-exchange reserves and the continued use of prudent monetary policies are all supporting macroeconomic stability. Commodity exporters, in particular, are benefiting from resilient terms of trade, while selected technology and energy exporters in Asia remain key growth engines.

At the same time, the global backdrop remains fundamentally attractive for capital flows into emerging markets: a moderately weaker US dollar and the prospect of stable or slightly lower US interest rates are supporting both bonds and equities. However, geopolitical risks have intensified: conflicts in the Middle East and volatile capital flows are increasing the likelihood of sharp market moves. 

From Brazil to South Africa: which countries currently offer opportunities in emerging-market bonds?

Emerging-market bonds could continue to outperform developed-market bonds in 2026 in a scenario shaped by a weaker US dollar and stable or falling US yields, which would support both segments. However, opportunities are far from uniform: local-currency debt offers the strongest upside potential, combining high real yields (300-500 bps) with undervalued currencies (BRL, MXN, ZAR). In some markets, inflation remains under control, giving central banks room to deliver moderate interest-rate cuts.

External debt is driven more by carry, with selective value in high-yield sovereign bonds where spreads still overstate default risk. Particularly attractive opportunities include domestic markets in Latin America and South African rates, as well as certain external-debt issuers in frontier markets such as Argentina and Ecuador.

Currencies under pressure: caution is warranted

The main downside risks include a fresh acceleration in US inflation and a cautious Fed, both of which would strengthen the US dollar and tighten global liquidity. Geopolitical tensions and volatile capital flows also heighten market uncertainty. 

The most pronounced structural risks remain in countries with low reserves and heavy external financing needs — notably frontier countries in Africa, Pakistan and Egypt — as well as in domestic markets where policy credibility is weak — such as Turkey, South Africa and Nigeria — where the foreign-exchange market becomes the main adjustment channel. Fiscal slippage is becoming increasingly critical, particularly in Latin America and parts of the CEEMEA region, where debt dynamics are deteriorating amid political constraints.

In conclusion, the fundamentals of many emerging markets remain solid and structural opportunities are still present. However, the risk environment has intensified due to geopolitical tensions and volatile capital flows. Investors should therefore adopt a selective approach, targeting local-market opportunities while hedging their portfolios against potential shocks.

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