FICC Focus EM Lens: Event Risk Set to Rise Yet EM Should Still Outperform
Dec 12, 2025
Elina Theodorakopoulou, a Managing Director and EM portfolio manager at Manulife Investment Management, discusses emerging markets' fixed income landscape. She highlights the impact of upcoming elections in various countries and the factors driving year-to-date performance including carry and resilient fundamentals. Theodorakopoulou also examines the state of central bank policies, the appeal of frontier markets, and the resurgence of local currency demand. Finally, she addresses medium-term concerns like inflation, geopolitical tensions, and upcoming U.S. midterms.
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Carry Drove 2025 Outperformance
- EM fixed income outperformed in 2025 driven mainly by high carry and strong local rates performance.
- Hard-currency sovereigns and EM corporates also showed resilience versus DM corporates.
Dollar Stability Is Sufficient
- A range-bound dollar, rather than a sharply weaker dollar, suffices to support EM performance.
- Lower commodity expectations (eg oil ~$55-60) help keep global inflation and term premium pressures down.
Be Selective; Prioritize Sovereign Quality
- Be selective and focus on sovereign fundamentals when allocating to EM debt because default prospects remain low.
- Use high carry to cushion portfolios and prefer credits with improving upgrade/downgrade dynamics.