Emerging market (EM) credit is showing strength and resilience amid global macroeconomic volatility, according to Warren Hyland, portfolio manager at Muzinich & Co.
In the asset manager’s latest EM Monthly published on Jul 9, Hyland notes that while the broader market has had to digest a change in expectations for US monetary policy, EM credit has held firm, buoyed by improving fundamentals, idiosyncratic drivers and supportive technicals.
“Despite the macro volatility, EM credit fundamentals have been resilient and supported by positive idiosyncratic developments in several countries,” writes Hyland.
This comes as investors scale back expectations for rate cuts by the US Federal Reserve. Earlier this year, markets had priced in multiple cuts. But persistent inflation in the US has delayed the Fed’s timeline, with consensus now expecting just one cut before the end of the year.
EM assets, which typically benefit from lower US rates and dollar weakness, have nonetheless found support from domestic dynamics. According to Hyland, a combination of stronger-than-expected data in several regions and improving commodity prices has helped credit spreads stay stable.
“Inflation has continued to surprise to the downside across several EM countries, allowing central banks in the region to maintain or resume accommodative stances,” he adds.
See also: Trade policy turmoil raises recession risk, but long-term equity outlook holds up: Capital Group
Latin America, in particular, has been a bright spot. Countries such as Brazil and Mexico have delivered stronger macro data in recent months, while local currencies have held up well. “In LatAm, improving terms of trade and prudent fiscal management have supported both sovereign and corporate credit,” Hyland writes.
Africa has also seen improving sentiment in select credits. Hyland notes that investor confidence has returned in places like Nigeria and Egypt following policy reforms, IMF support and an improved external balance. He cautions, however, that differentiation remains key. “We remain selective in Africa, favouring countries where reform momentum is credible and backed by multilateral support.”
Meanwhile, Asia remains mixed. India has continued to show strong growth and political continuity following recent elections, while Indonesia and the Philippines have also posted relatively robust data. But China remains the outlier.
See also: US fiscal expansion keeps USD weak as treasury yields fall: Lombard Odier
“Chinese credit markets are being watched carefully — while valuations appear cheap, the macro backdrop remains uncertain,” says Hyland. He adds that while Beijing has stepped up stimulus efforts in recent months, concerns around the property sector, weak consumer confidence and sluggish private investment persist.
Hyland also points to technical factors that have bolstered EM credit so far this year. These include strong fund inflows into dedicated EM strategies, limited net new issuance, and relatively low default rates.
“Technical factors, including strong EM fund inflows and constrained new issuance, have also underpinned market performance,” he says.
According to data cited in the report, EM hard currency credit has outperformed several developed market segments year-to-date. Dollar-denominated high-yield bonds, in particular, have benefited from renewed investor appetite. Hyland sees this continuing, especially in regions offering attractive risk-adjusted returns.
“High-yield corporates in LatAm and parts of Africa remain attractive due to their improved credit metrics, reduced leverage and still-elevated carry,” he writes.
Still, Hyland cautions that global macro risks remain. Chief among them is the trajectory of US inflation and policy rates, which could affect risk appetite across the board. Political risk is also rising, with upcoming elections in several EM countries and the US presidential race in November. Geopolitical tensions — particularly in the Middle East and Eastern Europe — are another factor to watch.
Despite these risks, Hyland is constructive on the asset class. “While global markets may remain choppy, we believe EM credit offers opportunities for selective investors focused on fundamentals.”
For more stories about where money flows, click here for Capital Section
He adds that active management and country-specific analysis remain essential. “We favour a bottom-up approach, identifying credits with strong balance sheets, improving earnings and supportive policy backdrops.”
Overall, Muzinich’s base case remains one of cautious optimism. The firm sees EM credit as offering a compelling combination of yield, diversification and fundamental support, even as global uncertainties persist.
“EM credit is not immune to global shocks,” Hyland concludes. “But current valuations, combined with strong underlying fundamentals and supportive technicals, suggest the market is well-positioned to weather volatility and deliver solid returns over the medium term.”
