Geopolitics and AI drive EMD (round table 'Emerging Market Debt' – part 2)

June 3, 2026

^{This report was originally written in Dutch. This is an English translation.}

In part 2 of this roundtable discussion on Emerging Market Debt, experts discuss the impact of geopolitical tensions, AI and shifting trade flows on emerging market debt. The discussion also covers allocation choices, yield drivers and regional opportunities within EMD.

By Manno van den Berg

We have seen significant volatility as a result of conflicts and shifts in global supply chains. How does this affect the appeal of EMD?

Drijkoningen: ‘To the extent that these developments influence expectations for global growth, they also affect the willingness to finance emerging markets. When shocks occur, investors tend to fixate on the immediate impact and react short-sightedly. But even with major events, such as the Russian invasion of Ukraine, effects are usually priced in within a few weeks, after which risk premiums adjust and fundamentals and economic incentives regain importance.’

Ceva: ‘I agree with that long-term view, but in the short term, every shock creates clear winners and losers. Markets reacted rationally to the conflict in the Middle East by distinguishing between oil importers and oil exporters. At the same time, geopolitical dynamics are shifting now that the US is playing a more active role in the Middle East and Latin America. This has a direct impact on markets and underlines the importance of approaching EM on a country-by-country basis, rather than as a single bloc.’

Elmi: ‘Don’t lose sight of the structural narrative. Emerging markets are benefiting from stronger demographics, higher growth and a growing middle class. We are also seeing more intra-market trade, which increases resilience. This makes EMD more resilient to global shocks.’

Anne: ‘We focus on fundamentals and maintain a high-quality bias. This is how we navigate volatility. At the same time, the category is benefiting from the current commodities climate. It’s not just about oil: countries with gold and other metals are also benefiting from strong trade dynamics.’

Nartey: ‘We are positive on a number of commodity-producing countries, but do not believe that all importers will be negatively affected. Some oil importers, such as Turkey, are actually in a strong position, with significantly improved reserves and support from their gold exposure. We also see opportunities in countries with steep yield curves that export other commodities, such as metals, including South Africa and Brazil.’
 

If you look at the spreads, EMD is more attractive than, for example, corporate bonds in developed markets.

 
Benson: ‘Markets are increasingly news-driven, whilst underlying changes, such as the reconfiguration of supply chains or the impact of foreign investment, take years to filter through. This creates a gap between perception and reality. Market prices can be erratic, but it is important to keep an eye on those underlying changes. Distinguishing between such signals and daily noise is becoming increasingly important.’

How should investors incorporate AI into their EMD investment approach?

Drijkoningen: ‘Emerging markets are relatively well-positioned to benefit from the commodities-driven aspect of AI growth. In the medium term, however, there are challenges: AI requires a high level of education, infrastructure and investment capacity, and the dynamics are likely to be a winner-takes-all scenario.’

Glavan: ‘Many investors associate AI with the US, but a large part of the physical backbone lies in emerging markets, through metals, mining and the production and assembly of hardware. At the same time, some countries are positioning themselves as AI hubs, such as the United Arab Emirates, Saudi Arabia and India. Emerging markets no longer merely supply the ‘picks and shovels’ for the AI gold rush, but are gradually moving up the value chain.’

Ceva: ‘We are already seeing the impact of AI in the trade dynamics of countries such as China, Taiwan, South Korea and Malaysia, which are benefiting from exports of semiconductors and hardware for the construction of data centres in the US. On the other hand, there may be negative effects for countries where AI disrupts service-oriented export models.’
 

We expect EMD to offer a more favourable risk-return profile than both equities and high-yield bonds in developed markets.

 
Thevakarrunai: ‘There may be clear winners and losers, depending on a variety of factors. Some countries will benefit from the increased demand for raw materials for the construction and maintenance of AI infrastructure, whilst other countries with more service-oriented economies may actually be negatively affected by new AI technology. This underlines the importance of active management in identifying the winners. As the divergence between countries increases, this will only become more important.’

What are the drivers of returns for the coming period and where do the investment opportunities lie in EMD?

Anne: ‘A market pullback, driven by geopolitical tensions, could present a tactical opportunity to rebuild positions, as entry levels become more attractive. At the same time, spreads are generally quite tight. Not just in EM, but across the global fixed-income market. In such an environment, alpha becomes more important, requiring a stronger focus on selection and fundamental analysis. You select strong sovereign credits and avoid the weaker names.’

Nartey: ‘Macro-positioning remains important – we make macro-calls – but there are many ways to generate alpha through bond selection. Moreover, market views can be interpreted in various ways.’

Elmi: ‘Country allocation will, broadly speaking, deliver benchmark-like returns, whilst alpha is more likely to come from bottom-up bond selection. Returns this year are likely to be driven to a significant extent by the high-income segment. With EMBI yields around 7%, the carry component is significant, which, combined with selective positioning, particularly in frontier markets, can lead to an attractive total return.’

How do you assess allocations to hard currency, local currency and possibly also corporate bonds in light of the macroeconomic cycle? Are there any favourites?

Lin: ‘We do not employ tactical allocation, but in the longer term we prefer hard currency, due to the high carry premium and its favourable diversification properties. In the short term, local currencies offer added value relative to hard currency. This is linked to tight spreads in hard currency and a macro environment in which a weakening US dollar supports local currencies in particular.’
 

The key driver of returns remains making the right country selections. Look beyond the benchmark and focus on where fundamentals are improving.

 
Ceva: ‘Spreads are tight across the board, so within sovereign credit we favour segments with higher yields, where there is more spread buffer and idiosyncratic upside potential. At the same time, local currency bonds offer attractive diversification and cyclical tailwinds, with attractive real yields and steeper curves in countries such as Mexico, South Africa and Peru.’

Drijkoningen: ‘The relative performance of hard and local currencies is driven by US Treasuries, the dollar and commodities. Although credit spreads are tight, real interest rates are at historically high levels, in both developed and emerging markets. This supports local currencies in the medium term, given the higher real risk premiums and the relative undervaluation of many currencies.’

Benson: ‘We are positive on EM government bonds, particularly in countries with improving fundamentals such as Argentina. In sub-Saharan Africa, we see opportunities in countries with favourable terms of trade and evolving inflation frameworks, which are less in sync with the broader EM cycle. We are underweight in high-quality names such as the United Arab Emirates and the Philippines, where valuations offer limited upside potential.’

Elmi: ‘We see strong opportunities in frontier markets that offer a combination of high carry and price potential. Countries such as Zambia stand out, thanks to structural reforms, commodity dynamics and improving sustainability. Countries such as Pakistan and Sri Lanka have taken a hit, but may offer attractive entry points. High-quality looks less attractive and parts of the mid-beta segment, such as double-B bonds, are relatively expensive.’

Glavan: ‘We prefer Latin America and parts of Africa, and remain underweight in Asia, particularly in corporate bonds, where relative value is limited. By sector, we are focusing on metals and mining, which are benefiting from the commodities cycle.’
 

Read the full article in Financial Investigator magazine