Emerging markets corporates: Winners and losers in an environment of global transformation

Even if US politics under Donald Trump harbours risks, Thomas Fischli-Rutz, Head of Emerging Markets at Fisch Asset Management, believes that the stable economic situation and robust fundamental data speak in favour of the return potential of corporate bonds from emerging economies. However, not every region and sector is equally interesting.

In the run-up to his inauguration, Donald Trump's social media posts alone portended a potential to shake up capital markets. Since 20 January, Trump has officially been the 47th President of the United States – and his political agenda may well lead to a reshaping of global trade relations. This is also likely to have a noticeable impact on the emerging markets and entail risks, but also opportunities, particularly for corporate bonds from these countries.

The expected protectionist US trade policy could accelerate the fragmentation of global supply chains. The big losers would be China and economies closely linked to it, such as Taiwan and Hong Kong. Other countries could fill the gap and benefit from the shift in supply chains. In our view, these include India, Indonesia and Vietnam, but also emerging Eastern European countries, such as Poland and Romania.

In addition, the tariffs announced by Donald Trump have caused the US dollar to appreciate significantly. A stronger US dollar traditionally weighs on sentiment towards emerging market bonds, as US investments become more attractive in relative terms. However, we believe that most of the expectations have already been priced in. Conversely, this means that if the tariffs are less severe or remain limited to certain goods, this could have a positive impact on the segment.

Emerging markets increasingly relevant
Emerging markets are increasingly maturing into emancipated nations. According to forecasts by the International Monetary Fund (IMF), their combined economic output, excluding China, will exceed the combined gross domestic product of the G7 countries for the first time in 2025. Emerging markets are expected to grow by 4.2% this year compared to just 1.8% for the industrialised nations.

In view of their increasing maturity, emerging markets are more relevant to investors than in the past. They are increasingly becoming a compelling alternative for global investors looking to avoid concentration risk in the US and Europe. Against this backdrop, corporate bonds from emerging markets, which exhibit robust fundamental data at present, could be worth a look. With a net leverage ratio of 0.9x for investment-grade issuers and 2.4x for high-yield issuers, the credit ratios remain exceptionally good. This is also reflected in low default rates: they are expected to be 2.7% in 2025 – below the long-term average of 4.4%.

Mixed picture in Latin America
At a regional level, Latin America showed stable growth last year. However, the picture was mixed at the country level: while there were signs of an economic slowdown in Mexico, Brazil once again grew by almost 3% – not least by virtue of a generous budget policy. However, the interest rate hike cycle there is likely to lead to a slight decline in growth.

The region offers very broad diversification and a good selection of creditworthy corporate issuers across all sectors and rating categories, particularly in the high-yield segment. The differences in the local economic cycles also allow for active management, and offer the ability to generate substantial alpha.

Uzbekistan and Turkey are appealing
The regions of Central and Eastern Europe, the Middle East and Africa are also extremely heterogeneous and therefore offer ample opportunities for diversification. Among other considerations, we are focussing on defensive financial issuers from Eastern Europe. In this respect, Uzbekistan is of particular interest, and we are increasing our exposure to Turkey. Since the appointment of Mehmet Şimşek as finance minister in 2023, measures have been introduced to combat inflation, strengthen the central bank and restore market confidence. The expensive Turkish local market has led to an overhang of US dollar issues and now the securities of the most solid companies are trading at generous risk premiums.

Cautious on China, opportunities in India and Indonesia
We expect economic growth in China to continue to weaken for structural reasons. Although the Chinese central bank (PBoC) has embarked on an easing cycle, the recently announced comprehensive monetary measures will hardly solve the country’s structural problems. Fundamental reforms, such as an expansion of the pension system are needed to shift growth drivers towards consumption. In the short term, however, united action on a monetary policy and government level can at least halt the loss of confidence.

In Asia outside of China, we expect many economies to continue to grow at a high rate. We favour countries that benefit from a strong domestic economy, such as India and Indonesia. These are less exposed to a possible escalation of the trade dispute between China and the US.

Positive return expectations
Overall, corporate bonds from emerging markets have evolved over the past ten years into an established asset class that can contribute to portfolio diversification. Against the backdrop of possible monetary easing in developed countries and stable economic growth in emerging markets, we expect positive returns in the higher single-digit range. The performance drivers are nominal yields at historically high levels and corresponding carry, an active primary market with a high proportion of first-time issuers and varying regional and sectoral developments that offer opportunities to create alpha in various scenarios.