In times of market turbulence, conventional wisdom tends to cast emerging market debt (EMD) as a risky and fragile asset class. Historically, when global volatility rises, capital often flees emerging markets in search of perceived safety in developed economies. Yet, what we’re seeing now is quite different - and in many ways, unprecedented.
Against a backdrop of US policy uncertainty, trade related tensions and elevated geopolitical uncertainty, EMD has proven not just resilient, but quietly compelling. This contrarian performance offers a powerful reminder that assumptions built on past cycles can obscure the nuances of present-day fundamentals.
Dollar weakness and the shifting global flow
A major catalyst for this shift has been the unwinding of US exceptionalism. For years, the United States attracted a disproportionate share of global capital as it led the post-pandemic recovery. Now, that momentum is slowing, and international investors are gradually reallocating away from US based assets - including treasuries, US equities and even private equity.
This evolving dynamic is resulting in a weaker dollar, which we believe still has room to fall further, albeit at a slower pace. For EMD investors, this dollar trend matters deeply. In the wake of Covid, many emerging market countries have taken steps over recent years to strengthen and reform fiscal policy, support growth and innovation, increase reserves, ultimately leaving them better placed to withstand recent shocks. Simultaneously, many governments whose debt-burdens did prove insurmountable, such as Zambia and Sri Lanka, now have their restructuring processes in the rear-view mirror.
As the dollar retreats, the successes of these emerging markets are beginning to get the recognition from global markets they deserve.
The quiet strength of local currency debt
In the first half of 2025, the JP Morgan Government Bond Index-Emerging Markets Global Diversified (GBIEM-GD) posted a 12.26% return, with gains evenly split between currency appreciation and local interest rate moves. This wasn’t a fluke. It was the result of prudent policymaking and improving fundamentals across a diverse array of emerging market countries.
Contrary to the assumption that EM local currency debt would be battered by rising US rates and trade uncertainty, many emerging market central banks now enjoy greater policy autonomy. Lower inflation across much of the emerging market universe has created room to cut rates without triggering currency depreciation, reclaiming the counter-cyclical tools that were often out of reach in previous crises.
Our portfolios reflect this shift. We’ve been increasing exposure to frontier markets where the spread between local bonds and US treasuries remains attractive and where currencies have already undergone substantial adjustment. We’ve also tactically reduced risk in high-beta currencies vulnerable to policy shocks, while leaning into relative value opportunities across the local rates curve.
Hedging smarter, not harder
Managing risk in this environment requires flexibility. While FX options have become a compelling hedging tool, investors can also find good value in credit default swaps. In markets such as South Africa and Turkey, for example, tight credit spreads represent potentially asymmetric pay-off outcomes in the event of rising risk aversion. We’re also selectively using euro and Asian currency baskets to hedge against further dollar softness.
While de-risking is important, over hedging does run the risk of diluting the exposure and the ability to deliver opportunistic returns that clients are looking for an EMD exposure. In hard currency funds, for example, we don’t hedge out dollar weakness - we adjust position sizes to account for heightened volatility, ensuring drawdowns remain manageable.
Why frontier markets deserve more credit
A standout story is the performance of African frontier markets. After years of devaluations and tough fiscal consolidation, many of these economies now offer less crowded trades, high carry, and improving policy frameworks. In markets like Nigeria, Zambia and Uganda, we’ve found opportunities to capture disinflation trends, strong real yields, and positive reform momentum.
The key is to be selective and opportunistic. Some of our trades are expressed through non-deliverable forwards (NDFs) where implied yield differentials are most compelling, while others remain in domestic bonds with local market access and liquidity support implementation.
A more nuanced global risk picture
What makes this moment different is that the epicentre of the current global shock is the United States itself. Tariffs, political polarisation and tight monetary conditions are combining to challenge the US growth outlook. Ironically, this is giving emerging markets - long considered the periphery - the centre stage in terms of relative resilience.
Markets are beginning to acknowledge this reality. IMF programmes are being met with real reform commitments in several emerging markets. Credit rating upgrades are outpacing downgrades for the first time in years. And bilateral and multilateral support has underpinned investor confidence in countries that were once seen as fragile.
Time for a rethink
For too long, investors have relied on outdated heuristics to judge emerging markets. But this time is different - not in a euphoric, speculative sense, but in the hard-earned structural improvements that emerging market countries have made over the past decade. With developed market fragilities on display and US policy increasingly unpredictable, it may be time to reconsider what ‘safe’ really means.
In a world of shifting power dynamics and global capital flows, emerging market debt isn’t just surviving the storm. It’s quietly leading the way through it.
Marcelo Assalin is head of William Blair Investment Management’s EMD team. The views expressed above should not be taken as investment advice.