Investors should consider EMD hard currency for a long-term strategic allocation within fixed-income portfolios to boost portfolio returns, rather than just a short-term tactical play.
Read this article to understand:
- Why investors should consider an allocation to EMD HC within fixed income
- The key growth drivers including resilience, diversification benefits and favourable macroeconomic trends
- How our investment approach balances alpha generation with prudent risk management
Historically viewed as a tactical allocation during periods of market volatility, emerging-market debt (EMD) has often been under-utilised in fixed-income portfolios. Yet, the rationale for a strategic long-term allocation to EMD sovereign debt denominated in hard currency (HC) is more persuasive than ever.
Emerging markets (EMs) constitute a formidable share of the global economic landscape, representing 85 per cent of the global population, 50.4 per cent of global GDP in 2024, and 65.9 per cent of global GDP growth over the ten years from 2014 to 2024.1 Despite this, EMD only accounts for 27 per cent of global fixed-income assets, which we believe represents a missed opportunity for investors.2
Moreover, the EMD market has grown substantially in terms of the number of issuers. In 1991, only four EM countries issued external debt. By 2025, that number had expanded to nearly 80, enhancing EMD’s resilience by spreading risk more evenly across a diverse range of economies.
Additionally, EM hard-currency sovereign debt has over a long period provided stronger risk-adjusted returns than global sovereign and investment-grade corporate debt from developed countries (see Figure 1).
Figure 1: Risk and returns of various asset classes over 20 years (per cent)
Past performance is not a reliable indicator of future performance.
Note: Historical returns and standard deviations for the period from December 31, 2004 to March 31, 2025. All returns and standard deviations are annualised.
Source: Aviva Investors, Bloomberg. Data as of March 31, 2025.
Over recent decades, numerous EMs have also implemented rigorous macroeconomic reforms to build resilience. Policies designed to mitigate external shocks and enhance credit quality have strengthened these economies. In 2025, nearly half of investment-grade (IG) sovereigns within EMs were rated AA to A, and some have been moved out of EM index into developed markets (DM), such as South Korea, Taiwan, Qatar and Kuwait.
Today, EMD offers exposure to a diverse spectrum of economies, from large economies like China and Brazil to fast-growing nations in Southeast Asia and sub-Saharan Africa, such as Indonesia, the Philippines, Cote d’Ivoire and Senegal. While each country’s economic profile differs, many share positive characteristics, including stronger growth prospects, lower debt levels, and favourable demographics compared to developed markets.
A resilient asset class
While the structural argument for EMD HC is compelling, assessing current market conditions is equally important. In recent years, many EM issuers have displayed resilience in the face of geopolitical and macroeconomic headwinds. This can be attributed to proactive measures taken by EM central banks, such as early and aggressive interest-rate hikes to combat inflation.
However, while these nations have acted prudently, they may still need to rebuild financial buffers that were drawn down during previous economic pressures, such as the Covid-19 pandemic. The International Monetary Fund (IMF) baseline projections for EM and global growth suggests that we are likely to see more of the same – slow but steady growth with controlled inflation, allowing these countries to rebuild those buffers and improve balances.3
The diversification of EM economies has also played a pivotal role in their stability. Commodity exporters like Chile and Peru have benefitted from high commodity prices, while nations such as Colombia and Kenya have driven growth through robust manufacturing, technology and service sectors. Moreover, many EM countries continue to exhibit resilience. Larger EMs are in a favourable position, with resilient growth driven by strong domestic demand and recovering real wages, and resilient external metrics. Furthermore, EM central banks have made progress in reducing inflation, with space to continue with rate cuts. Negative output gaps in many economies suggest potential for further growth, and external risks have decreased due to ongoing macroeconomic rebalancing. Nonetheless, thorough bottom-up assessments remain essential when evaluating these investments.
Spreads look fairly priced across much of EM. The risk-reward profile for investment-grade spreads looks stretched but all-in yields remain attractive. With all-in yields at the highest levels in a decade (see Figure 2), the present moment offers a compelling opportunity to lock in these elevated rates. Technical factors further support this outlook, and although positioning among both EM-dedicated and crossover investors is cautious, technical factors are supportive due to a broader range of participants and contained issuance expectations.
Figure 2: EMD all-in yields remain high (per cent)
Past performance is not a reliable indicator of future performance.
The Markit CDX Emerging Markets Index (“CDX EM”) is composed of fifteen sovereign reference entities that trade in the CDS market.
Source: Aviva Investors, Bloomberg. Data as of March 31, 2025.
Our approach to EMD
At Aviva Investors, our approach is designed to generate alpha throughout market cycles, with a focus on sustained outperformance., The Aviva Investors EMD Hard Currency Sovereign strategy has historically generated alpha regardless of the direction of spreads (see Figure 3).
Figure 3: Performance of Aviva Investors EMD HC Sovereign strategy versus spread (per cent/bps)
Past performance is not a reliable indicator of future performance.
Aviva Investors EMD Hard Currency Sovereign USD composite (inception date January 1, 2004) and J.P. Morgan EMBI Global index.
Source: Aviva Investors, Bloomberg, eVestment. Data as of March 31, 2025
We believe EMD’s alpha potential lies in the breadth and diversity of this under-researched and often underreported asset class.
Yet many EMD investment approaches fail to capture this potential due to inherent structural biases. These often result in an overexposure to higher-risk market segments, a heavy reliance on conventional risk metrics, and an inability to distinguish between beta and alpha drivers in portfolio construction. Our unbiased approach to EMD avoids these common pitfalls: we explore opportunities across the investable universe. This allows us to build portfolios free from pre-set biases, generating alpha that is independent of high-yield and investment-grade spread differentials.
We focus on the most attractive opportunities, irrespective of credit rating, with a deep understanding of EM-specific risks. By recognising the limitations of traditional risk metrics, we construct portfolios that prioritise capital preservation while consistently outperforming benchmarks. Additionally, effective liquidity management is central to our approach, which can help our portfolios remain resilient across market conditions. This rigorous and comprehensive approach delivers a smoother, more stable return profile, strengthening the case for making EMD hard currency a structural allocation in fixed-income portfolios.
EMD represents a critical, yet underappreciated, component of global fixed-income portfolios. As the asset class grows in significance, driven by stronger fundamentals and favourable macroeconomic conditions, it offers investors a powerful opportunity for diversification and yield enhancement.
