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Jean-Charles Sambor

Market Outlook

Q2 EM Debt Outlook

Outlook
12 July 2026

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Head of Emerging Markets Debt

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Latest EM Debt economic and market outlook. 

The month of June was characterised by two distinct phases. During the first half, markets remained focused on elevated oil prices and the risk of further disruption stemming from the US-Iran conflict. The second half saw a sharp reversal, with lower oil prices driving a relief rally across global rates and risk assets such as equities. We expect the rates rally to continue and believe we have passed peak hawkishness from the Fed. One notable feature of this move, however, was that the US dollar remained unexpectedly strong.

Typically, such risk-on moves would be accompanied by US dollar weakness, particularly against emerging market currencies. With this in mind, one of our highest conviction themes is a recovery in Asian currencies.

We have identified a growing trend of Japanese households and global hedge funds using the yen as a funding currency to access higher-yielding emerging market currencies such as the Turkish lira, Brazilian real and Colombian peso. These flows have become an important contributor to yen weakness and have left positioning increasingly one-sided across several high-carry currencies. We believe the risk-reward is now skewed towards a reversal of these dynamics, particularly if market volatility rises or investors begin to reduce risk. Such an outcome could trigger a sharp unwind of yen-funded carry trades, leading to yen strength and weakness in a number of crowded high-carry EM currencies. We are positioned to benefit from this scenario through long yen exposure against a basket of high-carry emerging market currencies. Alongside this, we maintain long positions in the Korean won, Thai baht, Indian rupee and Indonesian rupiah, which we believe are well placed to outperform as current FX dynamics normalise.

Regarding the Korean won in particular, many foreign investors and ETFs that benefited from the strong performance of SK Hynix and Samsung became forced sellers in order to manage active weights relative to benchmark. This resulted in substantial equity outflows and significant pressure on the won. We believe these dynamics are likely to reverse as the performance of these equities moderates and foreign ownership levels, which are now relatively low, begin to normalise. In addition, a reversal of the crowded yen-funded carry trade could provide a further tailwind for the won and other Asian currencies, as investors unwind positions that have benefited from prolonged yen weakness. Taken together, we believe the risk/reward remains attractive for a long position in the won.

Aside from FX, our other key conviction is in sovereign credit, where we have built a large position in Lebanon. Investor sentiment remains extremely negative, with limited sell-side coverage and very little institutional ownership. However, we believe markets are overlooking meaningful improvements in the underlying fundamentals.

Despite the ongoing conflict, the government continues to make progress on key reforms. Both the Finance and Economy Ministers are highly competent technocrats that are advancing banking sector reforms. By pushing for deeper haircuts for depositors, these reforms should ultimately prove favourable for bondholders, increasing the resources available for debt repayment. Successful implementation of these reforms would also pave the way for IMF support. Given the geopolitical situation, the IMF is becoming more lenient, and there is likely to be some support from France and the US. From a technical perspective, much of the real money selling appears to have already taken place, while very few hedge funds have built meaningful positions to our knowledge. We therefore continue to see an attractive risk/reward opportunity.

By contrast, we have reduced exposure to Venezuela aggressively and are now only marginally overweight. The appointment of Centerview to lead the largest sovereign debt restructuring in history is likely to generate a series of negative headlines. We expect initial restructuring proposals to incorporate very conservative assumptions regarding fiscal sustainability and recovery values before ultimately converging towards a negotiated outcome. We therefore anticipate further near-term volatility. Should valuations come under additional pressure, we would expect to rebuild the position, as we continue to believe there is strong political incentive to reach a relatively swift resolution and there are many powerful vested interests pushing for this. Meanwhile, we remain underweight Ukrainian sovereign debt and overweight Ukraine corporate debt. Our view is that if the war is still ongoing, this is negative for credit. Even if there is a ceasefire or lasting peace, we do not expect a significant recovery in Ukrainian bonds. Indeed, there could be another round of debt restructuring as many of the EU loans will be converted into grants, which could require additional haircuts for bondholders. Thus, the risk/reward appears skewed to the downside for Ukrainian sovereign credit. For Ukrainian corporates, we believe the opposite is true. Most are relatively functional, well managed businesses with low debt. Even in highly uncertain times, they largely continue to pay their debt, and when there is a restructuring, there is typically a very high recovery rate.

Elsewhere in the corporate credit book, we remain overweight Chinese property developers, where there have been positive restructurings and signs of stability in the market.

Finally, we retain a variety of hedges to protect against spreads widening. These include EMBI total return swap and CDX US HY positions, as well as some single name CDS including Turkey, Colombia, Panama and China. These protected the portfolio during the drawdown in March. We tactically reduced the shorts as the market rebounded, before re-building them.

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