Whether it’s economic growth prospects or company fundamentals, conditions in emerging markets (EM) are looking increasing favourable. Indeed, the outlook is arguably the most positive that it’s been at any time during the past decade – a period which was dominated by US exceptionalism, a steady stream of capital flows into the US, and the resulting stronger dollar.
Our economists expect EM GDP to grow by 4% this year and next, with the growth gap relative to the US widening to 2.8 percentage points (ppts), compared to just 1.5 ppts in 2024.
Inflation, meanwhile, is steadily heading lower in the developing world, paving the way for more interest rate cuts.
Add in expectations for a weaker dollar, which is being undermined by US tariffs, and it’s not surprising that an increased allocation to EM corporate bonds is one of the recommendations in our Secular Outlook 2025.
The opportunity needn’t come with increased risk. For instance, with the help of rising demand from local investors – as local savings pools have grown – EM corporate credit remained relatively stable in the wake of Liberation Day market turbulence. Spreads relative to US Treasuries rose by just 55 basis points during the first week of April, compared to 120 bps for US high yield (see Fig. 1).
Spread vs US Treasuries, bps
Source: Pictet Asset Management, Bloomberg. Data covering period 01.01.2024-11.07.2025.
The greater resilience reflects stronger fundamentals, such as more manageable debt burdens among EM corporates. The premium commanded by a company’s bonds compared to its degree of indebtedness, or spread per turn of leverage, is high both relative to that of US businesses (for every rating bucket apart from Bs) and to its own history (see Fig. 2). That means investors are reaping attractive yields for relatively low risk.
Furthermore, duration is fairly low in EM corporate space, at around 4-4.5 years compared to 7 years for US investment grade corporate bonds. This helps cushion against any increases in “term premium” – the extra yield that investors demand for holding longer-dated bonds.
Spread (versus US Treasuries) per turn of leverage, bps
Source: LSEG, Pictet Asset Management. Data covering period 31.01.2008-30.04.2025.
As stars align for EM credit, they could unlock significant inflows into the under-owned asset class, creating a virtuous circle. That’s because offshore retail investors have been divesting since 2021.
Domestic growth potential
Against this backdrop, where are the best opportunities? As investors in EM corporate bonds, we believe that it's crucial to be well diversified across countries and sectors, keeping liquidity in mind at all times.
With tensions over global trade and uncertainty over government policy and macroeconomic outlook in the US, our current focus is on areas of the market that can benefit from strong domestic economies. That includes allocation to parts of Latin America, where exposure to US tariffs is relatively modest thanks both to low share of goods exports in GDP, and low share of the US in those exports. For instance, Brazil, Argentina and Peru fall into this category. We also value close links to China, and the fact that a number of Latin American central banks are already on the path of rate cuts, adding to the region’s attractions.
In Argentina, Javier Milei’s reforms are significantly improving the country's economic standing, coming alongside a new USD20 billion IMF loan deal and a fall in inflation. This has created investment opportunities in some Argentinian quasi-sovereign companies and utilities. We’ve seen an increase in issuance, accompanied by solid demand from investors.
In Colombia, meanwhile, political turmoil has led to cheaper valuations. With a change in political direction at next year’s election looking increasingly likely, the country could offer some interesting investment opportunities in the coming 12 months, especially as a lot of the fiscal risk is already discounted.
We also see potential in bonds issued by Chinese technology companies, which have strong net cash positions, an improving credit rating outlook and attractive valuations. AI is a priority for the Chinese government, so we expect the regulatory environment to be supportive too.
Conversely, we have reduced positions in some metals and mining companies and in diversified conglomerates, as well as in parts of Asia – regions and sectors which are likely to be more affected by any blips in global growth or escalation of trade tensions.
Uzbek gold, Peruvian gas
While we attach great importance to our macroeconomic scores, we believe that, ultimately, company fundamentals are key to generating attractive risk-adjusted returns in EM credit. We scrutinise corporate balance sheets and valuations to identify both buy and sell opportunities. Our preference here is towards stable revenues which are largely protected from tariffs.
Away from the mainstream, and with the benefit of a visit on the ground, we have identified several companies in Uzbekistan which meet the brief. The country is largely isolated from tariffs (US accounts for just 0.8% of total exports), with 6% GDP growth, 15 months’ reserve cover, relatively low debt levels at 33% of GDP, and growing reform momentum including ongoing WTO accession negotiations. Drilling down into company fundamentals, we see some attractive valuations and strong potential among largely state-owned issuers in gold mining and gas.
In Latin America, meanwhile, an example is recent primary market issuance from a major Peruvian gas producer, whose revenues are cushioned by fixed domestic gas prices and take-or-pay contracts guaranteeing minimum volumes for the next three years. Low lifting costs, rich gas fields and large reserves add to the appeal, and this position fits in with our theme to focus on low-cost production local champions in the oil & gas sector.
Such companies combine attractive valuations and strong corporate fundamentals with a positive macro backdrop and defensive characteristics. As part of a diversified portfolio, they can help deliver attractive risk-adjusted returns, capitalising on an increasingly favourable environment for EM credit.
Emerging market corporates at Pictet Asset Management
We take a balanced approach to EM credit, with focus on diversification, liquidity and credit preservation. Our approach is active, local and research driven, with company fundamentals playing a key role in investment decisions.
Our investment process starts with macro views on EM economies, sectors, credit ratings and duration. We then looks at valuations, considering a number of parameters including spread, leverage and relative value across a broad universe of some 800 issuers.
Fundamental analysis – including balance sheets, cash flows, capital structure, covenants, corporate governance, ESG – helps us narrow down the opportunity set to around 300.
From this we construct our portfolio of 100-150 issuers, striving for optimal liquidity, diversification and risk management.
