For many European institutional investors, emerging markets local currency debt still sits firmly in the “high-risk bucket,” associated with volatile currencies, fragile macroeconomics and unpredictable politics. The Middle East conflict—with its attendant oil price pressures, risk-off capital flows and currency volatility—will do little to dispel that perception in the near term; yet it is precisely in turbulent periods like these that the structural transformation quietly reshaping the asset class deserves closer attention.
In our view, improving fundamentals, high real yields and a more benign local currency backdrop in recent years point to a potentially attractive entry point—for both new allocations and long-term holders reassessing their exposure. This new paper assesses the opportunity through the lens of a European institutional investor, given the distinct risk/return dynamics of investing in this asset class in euros.
Some of the key attributes of the opportunity include:
- A clear EM growth premium and inflation convergence story
- Improving credit quality and a broadening investment-grade universe
- High nominal and real yields relative to both history and developed markets—providing a meaningful cushion against near-term volatility
- A more supportive macro and FX backdrop, with country-level differentiation increasingly rewarding active management
