Through this period, emerging market economies, including frontier countries, have on average grown by more than 4% and companies domiciled in these countries have generally benefited as well. This growth has been achieved without a significant increase in government debt. According to IMF data, net government debt for advanced economies is above 80% while for emerging economies it hovers close to 45%.

When looking at historical returns generated from underlying investments, it is helpful to look at the Sharpe ratio, which expresses how much excess return is received for the volatility of holding a riskier asset. Using data from 2003-2024, the return profile for hard currency emerging market debt issued by sovereigns and corporates is significantly above that of sovereign debt issued by the US, other developed market sovereigns and US investment grade companies, even during a period that includes US exceptionalism.

The wave of defaults due to the pandemic and the Russian invasion of Ukraine is behind us: there have been no sovereign defaults since the end of 2023. We believe default rates have peaked for EM sovereigns which should be a tailwind for performance. EM corporate defaults have also been decreasing over the last couple of years. The outlook from credit rating agencies for emerging-market debt has become more positive than negative: ratings upgrades are on an improving trajectory, with more upgrades than downgrades recently. In EM sovereign markets there have even been a few ‘rising stars’ –credits that are expected to receive at least two out of three investment grade ratings.

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