Improvements across EM economies in terms of growth, resilience and risk levels are making EM debt a more appealing choice for fixed income investors, especially relative to developed markets (DM).
With DM economies increasingly characterised by large fiscal deficits and growing political instability, perceptions of risk between EM and DM are converging, according to a research note from M&G Investments.
For example, at a time when investors are growing ever-more concerned about the sustainability of US debt, EM economies are profiting from low debt-to-GDP ratios, as well as a reputation for fiscal discipline.
This is reflected by positive rating migrations in 2024, when 14 EM sovereigns received upgrades, more than at any time since 2011, based on data from Fitch Ratings.
EM growing faster than DM counterparts
M&G research also points to growth in EM economies outpacing DM consistently over the last few decades – something that looks set to continue.
IMF data supports this, showing emerging and developing economies growing 3.7% in the year to April 2025, compared with 1.4% for advanced economies. Even tariff announcements didn’t impact EM forecasts as much as they did for DM.
“Furthermore, the breadth of the accessible EM universe, encompassing nearly 100 countries, ensures that despite country-specific growth risks as a result of tariffs, there is plenty of room for diversification,” added M&G.
The much larger working age population within EM also bolsters their growth outlook, offering optimism for momentum as well as domestic consumption. By contrast, M&G highlights the additional strains of declining workforces and ageing populations on government debt within DM economies.
Macro forces favour EM outlook
Coupled with the benefits for inflation from swift and effective action by central banks in EMs, the weakening of the US dollar in 2025 has been positive for local currency bonds in EM – which have outperformed most parts of the fixed income landscape in the first half of the year.
“Given the debt dynamics facing the US, the move away from the [US] dollar as the world’s reserve currency could be the beginning of a longer-term trend,” added M&G.
At the same time, M&G research spotlights steadily improving corporate credit quality. For example, as of end-April 2025, there were only nine EM issuers rated CCC+ and lower, compared with 15 in January, according to research from S&P Global.
“EM companies can be characterised by more favourable debt metrics with lower net leverage levels and stronger interest coverage ratios,” added M&G.
A lower default rate for EM names relative to DM is also worth noting – with the 12-month trailing speculative-grade default rate at 0.9% for EMs versus 4.3% in the US and 3.8% in Europe, based on data from S&P Global.
