EM bonds 2026: Tailwinds thanks to geopolitical turnaround

2025 was a strong year for emerging market (EM) corporate bonds – and 2026 is shaping up to be at least as constructive. This performance is not merely a short-term rebound, but part of a broader global trend: the shift away from “US exceptionalism”. EM issuers are among the clear winners of this environment and have demonstrated impressive resilience.

Recent actions by the US administration in Venezuela have increased geopolitical risks in Latin America, but regional contagion appears unlikely. The overall positive sentiment is underpinned by the International Monetary Fund, which expects emerging markets to grow by 4.0% in 2026 – more than twice the pace of developed economies, forecast at 1.6%. With emerging markets already accounting for around 60% of global GDP, and this share continuing to rise, they are an essential component of any well-diversified portfolio.

Technology, commodities and AI as structural growth drivers

The technology rivalry between China and the US is strengthening the position of many emerging markets. They benefit from higher demand for commodities and technology exports, while simultaneously developing their own technological capabilities. Elevated commodity prices remain a powerful growth engine. Gold is likely to stay in strong demand in 2026, supported by central bank purchases and diversification by private investors. Base metals, such as copper and aluminium, continue to benefit from investments in artificial intelligence and electric vehicles. Oil prices are expected to remain at relatively lower levels due to potential additional supply from Venezuela, but higher global demand and geopolitical interests – particularly in the Middle East – should provide some offset.

Macro tailwinds from a weaker US dollar

A softer US dollar provides significant macroeconomic support. It dampens inflationary pressures and gives central banks room to cut interest rates. The global rate-cutting cycle is therefore expected to continue into 2026, including further steps by the Federal Reserve.

Demand for US dollar bonds from institutional investors in Asia and the Gulf states remains strong, with an increasing shift in demand towards issuers outside the US. Since President Trump’s “Liberation Day”, retail inflows have also turned positive again. A further depreciation of the US dollar would likely reinforce this trend. On the supply side, net new issuance is expected to remain negative for the fifth consecutive year, as favourable liquidity conditions in local markets provide issuers with alternatives to the USD bond market.

EM corporates more robust than US peers

Emerging market companies continue to be supported by robust fundamentals, driven by rising revenues and earnings. Net leverage is significantly lower than that of US peers, and credit metrics are stronger across rating categories. This strength is reflected in ratings trends: for the first time since 2019, the number of rising stars exceeds fallen angels. As a result, valuations remain historically tight in many regions and sectors. In government bonds, USD-denominated Chinese sovereigns even trade at a negative risk premium versus US Treasuries. We expect countries such as South Korea, Hong Kong and Qatar to follow this path and outperform their US counterparts.

Latin America: fertile ground for active management

We remain overweight Latin America. Growth in the region is robust but highly differentiated across countries, creating opportunities for active management. Commodity exporters and consumer-oriented companies are particularly attractive.

Peru and Chile should benefit from high precious and base metal prices. In Mexico, we expect an acceleration in growth, supported by a recovery in US and global industrial production. The USMCA trade agreement is also up for renegotiation, with both sides likely interested in preserving it largely intact. Brazil, by contrast, may see slower growth due to persistently high interest rates, although upcoming elections could lead to more expansionary fiscal policy and stronger growth.

Presidential elections are also scheduled in Peru and Colombia. While elections may trigger volatility, we expect overall market-friendly outcomes. Although the US government's influence in Venezuela increases geopolitical risks in the region, we do not expect military intervention to spread to other countries. With regard to the upcoming elections, there is a possibility that the US government will exert indirect, so-called ‘soft’ influence, particularly in Colombia and Brazil, in order to remove the left-wing presidents there. Increased security concerns among the population, particularly due to a rise in immigrants from Venezuela, may also promote right-wing positions, as recently observed in Chile. Overall, however, a possible political shift towards the centre or centre-right in the region would be viewed positively by markets, and a gradual economic opening could allow other Latin American countries to benefit from exports to Venezuela over the longer term. The diverse developments also offer good opportunities for active management.

CEEMEA: attractive euro issuance and reform momentum

Central and Eastern Europe, the Middle East and Africa (CEEMEA) offer heterogeneous diversification opportunities. Eastern Europe should benefit from Germany’s economic recovery and substantial subsidies from the European SAFE Fund. We expect attractive euro-denominated issuance and therefore remain overweight. In the Middle East – particularly the Gulf states – economic diversification is progressing dynamically. Central Asia is also advancing reforms. Turkey, however, is likely to remain volatile due to political risks, prompting us to stay underweight and focus on established, defensive issuers.

China: tight spreads and focus on high-quality growth

China has emerged as a winner from the trade conflict with the US. Following an agreement in November, tariffs have effectively returned to pre-escalation levels. Domestically, China still faces structural challenges in a deflationary environment. Reforms aim to reduce excess capacity, while demand-side initiatives, such as childcare and elderly care pilot projects, underline the focus on high-quality growth.

Given historically tight credit spreads, we see China as a defensive long position in investment grade. The negative risk premium on USD-denominated Chinese government bonds anchors corporate spreads. We remain underweight in high yield, where smaller companies often suffer from weak governance and limited transparency.

Asia ex-China: exports versus domestic demand

Elsewhere in Asia, economies fall into two groups: export-oriented markets, such as South Korea, Taiwan, Singapore and Thailand, and domestic-demand-driven economies, like India, Indonesia and the Philippines. Exporters continue to benefit from strong AI-related investment in the US, the Middle East and in Asia, while strong domestic economies are set to maintain high growth. However, valuations are elevated, leading us to position selectively.

Return outlook for 2026: where EM investors can find alpha

We expect emerging markets to deliver mid-single-digit returns in 2026, with potential upside if the US rate-cut cycle is faster or deeper than anticipated. Nominal yields and carry remain attractive, while capital gains will depend on careful selection and idiosyncratic opportunities. Thanks to the heterogeneity of regions and sectors, EM corporate bonds continue to offer ample opportunities for alpha generation.