Dispelling myths in emerging market debt

• Emerging market debt is a large, diversified asset class that has delivered strong performance thanks to big improvements in policy and governance.
• In our view, negative perceptions of the asset class – ie, that it is “too risky” – are outdated.
• We argue emerging market debt should be a strategic allocation in portfolios because of its potential to provide diversified alpha and compelling risk-adjusted returns.

Emerging market debt has its origins in the 1990s, when defaulted sovereign bank loans were restructured into tradable hard currency (US dollar) bonds known as Brady bonds. The asset class has grown hugely since then – many more issuers have come to market and total assets have boomed (see Exhibit 1). Yet some negative attitudes formed in the early days of the asset class have proved persistent, even though they no longer reflect reality. In this article, we will puncture some of the myths about emerging market debt.

Myth I: Emerging market debt is suitable only for a few specialised investors

Emerging market debt is sometimes considered a niche asset class that is appropriate only for a limited set of investors with a high risk tolerance. The perception is that liquidity is low and credit events frequent in this space. For those who hold this view, it is no wonder that emerging market debt accounts for a small or nonexistent allocation in many portfolios.

Reality: Emerging market debt is a large and well-diversified asset class

Emerging market debt has undergone a remarkable transformation over the last 30 years. Emerging market hard currency bond issuers span over 70 countries and include a wide array of opportunities across geographies and credit profiles (Exhibit 1). Worth more than USD 25 trillion, the market for emerging market debt dwarfs the markets for US investment grade (about USD 8 trillion) and US high yield (USD 3 trillion).¹ The landscape of emerging market local currency opportunities has also developed significantly, with the number of countries in the main reference index – the JPMorgan GBI-EM Global Diversified index – growing from 11 in the early 2000s to 20 today, with two more countries likely to join the index in from early 2027. Indeed, most emerging market issuance is now in local currency, reflecting growing and deepening domestic debt markets. With local dynamics taking on more importance, local currency opportunities have become a richer source of investment outperformance, or alpha. This evolution underscores what we see as the maturity and relevance of the asset class as a core component of global fixed income. 

Myth II: Emerging market debt involves too much risk for too little return

For some investors, emerging market debt calls to mind high-profile defaults and financial crises, such as Argentina’s sovereign default in December 2001 or the Mexican peso crisis of December 1994. These events shape a perception that the asset class is inherently risky and unsuitable to deliver attractive risk-adjusted returns.

Reality: Emerging market debt has delivered strong risk-adjusted performance

Returns on emerging market debt have outperformed both US high yield bonds and US Treasuries over the past 30 years (Exhibit 2). These returns have not come at the expense of credit quality; the emerging market debt universe is, on average, investment grade. Indeed, in recent years, many emerging market countries have strengthened their institutions, adopted more prudent fiscal policies and built robust foreign exchange reserves, making them more resilient to shocks.

As it has grown, the asset class has become more diversified, which can help to reduce contagion risk – if crises occur, they do not necessarily impact the entire asset class. Default dynamics also compare favourably. Over time, default rates in emerging market debt have not been structurally higher than in the developed market high yield sector, while recovery rates have often been stronger.² With active management and rigorous sovereign and credit analysis, we believe emerging market debt can offer attractive risk-adjusted returns and diversification benefits within a global portfolio.

Myth III: Emerging market countries are poor at policymaking

Emerging market governments have often been viewed as laggards in policymaking. They are seen to be grappling with governance challenges and institutional instability that far exceeds what is found in developed markets. This perception has historically deterred some investors, who view emerging market sovereign issuers as inherently unstable and unpredictable.

Reality: Emerging markets are increasingly fiscally competent and economically healthy

Many emerging markets enjoy better fiscal positions than developed markets. Indeed, on several measures – including fiscal deficits and debt-to-GDP ratios – many emerging markets now compare favourably with developed market peers (Exhibit 3). In addition, emerging market economies keep growing faster than developed markets. This improved policy credibility has been a key factor underpinning greater macroeconomic resilience and investor confidence in the asset class.

Emerging market debt has undergone a profound transformation over the last 30 years, yet perceptions among some investors have not caught up. Indeed, this evolution has not been fully reflected in investor allocations, which remain relatively low compared with the size and significance of the asset class. Early crises and defaults in the 1990s cast a long shadow, but many emerging economies have made great strides in strengthening their policy frameworks and institutional resilience. They have built more diversified economies, deepened their local debt markets and improved communication and relations with international investors. This progress was evident during the Covid-19 crisis, when several emerging markets responded with agility and effectiveness.

In our opinion, both our macroeconomic analysis and rating agencies’ credit assessments confirm an improvement in emerging market economic fundamentals. Since 2023, emerging markets are more likely to have had their credit ratings upgraded than downgraded (Exhibit 4). The asset class – as captured in the JP Morgan EMBIGD Index – is now, on average, rated investment grade, providing a strong foundation for its risk-return profile.

In this context, we believe emerging market debt should be considered a strategic allocation within global fixed income portfolios, offering a combination of income, diversification, and exposure to structurally improving economies.

*This is an updated version of an article first published in September 2025. 

1. Source: JP Morgan
2. Source: JP Morgan