Prior to the onset of COVID-19, much had been written about the appeal of emerging market debt (EMD), touting the yield advantage as well as its lower correlation to other fixed income asset classes. EMD has underperformed since the pandemic, and this has left investors wondering if and how EMD fits into their asset allocation. After this difficult start to the 2020s amid sharp increases in inflation and rates, U.S. dollar strength, rising geopolitical risks, and meaningful capital outflows, conditions in the asset class warrant a fresh look. As the sector continues to develop and mature, we acknowledge that EMD performance may moderate. This does not limit its attractiveness but helps us refine our investment themes. From our perspective, we see five structural factors that should support the emerging markets over the coming five years and possibly beyond:

• The Cyclical Headwinds Turning to Tailwinds: A reversal of inflationary pressures leading to EM central bank easing cycles
• A Maturation of EM Economies: More sustainable debt structures and a growing share of GDP
• Solid Fundamentals: Lower debt-to-GDP and total debt burdens
• Favorable Demographics: Younger, growing populations that fuel growth
• Great Power Competition: EM economies expected to benefit from the global realignment