Emerging market investment grade (EM IG) bonds, considered the defensive corner of fixed income, offer the potential for steady returns from higher yields and lower volatility. These bonds are underpinned by strong fundamentals, broad regional and sector diversification, and a track record of resilience during financial crises. Active managers can capitalize on inefficiencies within the EM IG space, presenting a compelling investment opportunity.
Uncertainty remains heightened in the second half of 2025, with key risks including shifting tariff policies, muted earnings growth, geopolitical tensions, concerns over US debt sustainability and US Federal Reserve leadership, as well as stretched valuations across risk assets. In Europe, investor concerns have deepened following the increase in tariff rates to 15%.
Against this backdrop, EM IG bonds offer a compelling alternative for investors seeking long-term income and portfolio resilience, while also providing diversification away from US policy-driven risks.
However, dedicated EM IG strategies remain scarce. This underrepresentation reflects both the asset class’s rapid evolution over the past decades and the persistent perception of risks associated with EM, which have slowed its broader inclusion in core fixed-income allocations.
Crucially, dispersion across EM IG issuers can create fertile ground for active managers to generate excess returns through spread optimization and issuer diversification. We believe that EM IG is an increasingly relevant opportunity for active investors aiming to enhance yield without materially increasing portfolio risk.
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