SSIM: Capture the upside of EMD in 2026

February 10, 2026

EMD

Given a largely benign macro landscape, and despite events in Venezuela in early January, we believe that emerging market debt (EMD) can build on the strong returns of the past year as investors adopt a less US-centric view of opportunities in the EM universe.

'We retain a cautiously optimistic view, with a resilient US economy tempered by ongoing geopolitical tensions,' Jennifer Taylor, Head of EMD at State Street Investment Management, says. The environment continues to be constructive for local currency EM debt, with hard currency also expected to benefit from Fed rate cuts and anticipated returns from high yield sovereigns.

'A continuation of positive real yields, declining inflation, fiscal prudence, and currency tailwinds provide a set of circumstances that are ‘just right’ for EM local currency debt - the so-called Goldilocks scenario,' Taylor explains. Even as US growth slows and Fed rate cuts ensue, the consequent lower Treasury yields and weaker US dollar can act as tailwinds for EM returns.

While valuations for higher quality issuers may appear stretched, many lower-rated countries are at the precipice of transformational change that could drive further rallies. Local currency EMD prospects are not simply determined by the Fed’s actions, as EM central bankers have built up credibility in delivering on policies that have supported their country’s growth. Mexico, Poland, Indonesia, and many others cut rates considerably in 2025, and are likely to continue to do so, albeit at a slower pace.

Although prospects for EMD are largely positive, there are risks:

A shift in sentiment stemming from geopolitical or trade tensions can weigh heavily on markets.
The softening US labor market sparked a downturn in consumer spending, something that could be exacerbated if tariffs keep inflation above target.
Election outcomes in EM countries such as Costa Rica, Colombia, Zambia, and Brazil - but also the US midterms.

'As the EMD universe encompasses a diverse spectrum of countries, each with their own political, economic, and cultural dynamics, we believe an indexed investment approach remains the most effective way to capture this diversity and harness the return potential efficiently and transparently,' Taylor adds.