Despite relentless market uncertainty, emerging markets debt (EMD) has produced strong outperformance since the end of 2023. With uncertainty likely to continue framing markets, we see a number of reasons for EMD to continue outperforming:
- Global growth appears resilient and growth differentials are in EMs favor;
- Improving EM fundamentals contrast a world of developed market deterioration;
- A U.S. rate cutting cycle is likely to reduce tail-risks;
- A weaker USD has multi-pronged benefits for Ems
- The macro environment supports carry—yields can generate strong returns
- And many of today’s visible risks emanate from the U.S.
This paper focuses on emerging markets’ role in rescripting the New World Order amidst the pervasive geopolitical, global macro, and country specific challenges. Populist tendencies and polarized political economies are commonplace globally with market implications that are likely escalate in the fourth quarter and throughout 2026. If these implications materialise, the impact across countries would be varied, expanding the opportunities for alpha generation.
Furthermore, as fiscal pressures across developed markets mount, the U.S. dollar has weakened despite interest-rate differentials moving in its favour. European assets have been the primary beneficiary of diversification from the U.S. assets YTD, but we believe the asset class offers an opportunity for investors to both diversify as well as outperform given the cyclical tailwinds and structural divergence in fundamentals that favour the EMD complex.
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The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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