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We've been investing in emerging market debt (EMD) for over 30 years, with deep experience across both fast-growing frontier markets and established economies - at the corporate and sovereign level.

So, what are the opportunities, risks, innovations and trends in EMD investing today? Read our far-reaching interview with Siddharth Dahiya, Global Head of EMD, to find out.

Q: Why should investors consider emerging market debt in 2026 and what are some of the most attractive opportunities?

Emerging market debt (EMD) enters 2026 in great shape. Across the asset class, we're seeing a range of positive dynamics. Hard currency sovereigns, for example, are experiencing a wave of ratings upgrades, reversing a decade-long trend of downgrades. This shift signals improving fundamentals and growing resilience across many EM economies.

Local currency EMD also stands out. Despite some recent depreciation, the US dollar remains expensive, which means yields in EM local markets are relatively attractive. This environment offers investors the potential for both income and currency appreciation - a combination that's relatively rare in today's markets.

On the corporate side, fundamentals are robust. EM corporate balance sheets are the strongest they've been since the global financial crisis, underpinned by prudent management and favourable technical factors. Demand for EM corporate debt is currently outpacing supply, which has translated into solid returns for investors.

Frontier markets - from Ghana's gold-driven recovery to Egypt's reform progress - are also showing real promise. Many have emerged stronger from the turbulence of the pandemic. Fiscal discipline has improved, foreign exchange (FX) reserves are healthier and debt profiles are more sustainable. 

In short, EMD is benefiting from a range of positive forces across the asset class - making it a timely and well-diversified opportunity for investors.

Q: How do you expect the EMD landscape to evolve over the next 12 months?

We see the this year as a period of steady momentum rather than dramatic change. What is catching our eye is the growing interest in local currency debt, especially in frontier markets that used to fly under the radar. Investors are starting to take notice, attracted by improving fundamentals and compelling yields in these markets.

After several years of significant outflows, we are now seeing a return to net inflows - a shift that reflects renewed confidence in the asset class. We think this positive momentum will continue for the foreseeable future.

Q: Which frontier markets stand out as offering unique potential - and what are the risks?

Frontier markets present a diverse set of opportunities, each with its own idiosyncratic stories. The risks here are less about broad macro shocks and more about country-specific factors. For example, some frontier economies are heavily reliant on oil exports, making them vulnerable to price swings. 

We've already seen this year the US capture former Venezuelan president Nicolás Maduro. Venezuela has been in default since 2017 and although bonds rallied in reaction to the news, they continue to trade significantly below par. The eventual recovery value on these bonds is likely to be higher than current market prices given the potential upside from an oil linked instrument. 

There's a lot to get excited about, elsewhere. Take Ghana. Its recent restructuring was a success, while a gold boom pushed its current account into surplus and lifted FX reserves to over US$11 billion. Egypt and Nigeria are also noteworthy, with disinflationary trends and high local yields creating attractive real returns. 

So, the frontier universe offers opportunities across the board - from performing dollar and local currency credits to distressed situations with turnaround potential. The key is to understand the unique narrative and risk profile of each market.

Q: Are there thematic strategies within EMD that investors should pay attention to?

Several themes are shaping the EMD landscape. The distinction between oil exporters and importers remains important, as does the impact of global tariffs and the ongoing trend towards nearshoring. 

Geopolitical developments, such as a potential resolution to the Russia-Ukraine conflict, could be transformative. A ceasefire or peace agreement would likely trigger substantial multilateral support and investment, particularly in Ukraine. It could also influence energy prices, benefiting EM economies where energy costs have driven inflation.

Tariffs have created both winners and losers. For instance, Mexico was expected to benefit from preferential access under the USMCA trade agreement, but a lack of follow-through investment has limited those gains. India, facing high tariffs, is less affected due to its relatively closed economy and exports focused on tariff-exempt services, rather than goods.

Q: How do you balance sovereign versus corporate EMD exposure in the current environment?

We believe both sovereign and corporate EMD have important roles to play in a well-constructed portfolio. Sovereign debt offers a wider dispersion of ratings, providing access to higher-yielding opportunities, while corporate debt tends to be higher quality, with a greater proportion of investment-grade issuers.

Sovereign bonds typically have longer duration, making them more sensitive to interest rate movements. With rates expected to fall, sovereigns may outperform. Conversely, corporates can offer defensive qualities when rates are rising or volatility increases.

Investors can blend these segments, tailoring the mix to market conditions and their objectives. This diversification helps manage risk and capture opportunities across the EMD spectrum.

Q: What role does currency exposure play in EMD returns, and how do you manage FX risk?

Currency moves are a key component of the EMD narrative, especially in local markets. Last year, FX appreciation against the dollar was a significant contributor to performance. Investors can benefit from both currency gains and yield compression in local markets. If the dollar continues to weaken, local currency EMD should remain attractive.

Managing FX risk is crucial, especially for corporate issuers. We pay close attention to companies' currency exposures, preferring those with natural hedges, such as revenues and liabilities both denominated in dollars. Where natural hedges are absent, we want to see robust synthetic hedging strategies to mitigate risk. In the end, it's all about discipline and ensuring your portfolio can weather any sudden currency swings. 

Q: How do you see global monetary policy shifts - especially potential rate cuts - impacting EMD performance?

Global rate cuts are good news for EMD. Lower risk-free rates enhance the appeal of higher-yielding markets like EM, encouraging investors to seek out additional carry. When US Treasuries offer lower yields, the incentive to allocate to EMD increases, driving inflows and supporting performance.

Looser financial conditions also mean more capital is available for emerging markets, often creating a virtuous cycle of investment and growth. Additionally, rate cuts typically put downward pressure on the US dollar, which can further enhance returns for local currency EMD strategies.

Q: What catalysts could unlock value in EMD over the next year?

There are many. Country-specific reforms, successful restructurings, and geopolitical developments could all move the needle. Increased investor attention and flows are also important. Despite EM accounting for around half of global growth, it remains a small portion of most portfolios. A secular shift towards greater EM allocations could unlock significant value for investors.
 

Q: For investors considering EMD today, what allocation strategies make sense - active vs. passive, hard vs. local currency?

Active management makes the most sense. The asset class is diverse and idiosyncratic, and evidence shows active managers consistently outperform passive approaches. In such a complex market, skilled security selection, risk assessment and country analysis add meaningful value that passive exposures simply can't replicate.

The choice between hard and local currency depends on risk tolerance. Local currency offers greater potential but comes with higher volatility, while hard currency can provide defensive qualities, especially in investment-grade segments. 

The good news? All areas of EMD have something to offer this year, allowing investors to tailor allocations to their objectives and market outlook. 

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We kick off calendar 2026 by trying our hand at our own sentiment indicators - combining valuation and implied volatility for the US equity and bond markets, the Aus equity market and ASX small caps. Are investors paying a premium price for market calmness? Then we check in on Morningstar's bottom-up valuations. There is a chasm between small and large cap valuations based on revenue multiples but not so much on earnings. Tech has done the heavy lifting in large cap valuation AND earnings in the US over the past decade and the trend is expected to continue - but can US smalls deliver on lofty targets and drive a catch-up? In US dollars, the US market has underperformed most major markets in the Americas. Then we look at how short-term (daily) volatility itself is becoming more volatile over time. Turning to the economy, we look at personal loan delinquencies and savings rates, with signs of deterioration in consumer behaviour.

A custom US equity market sentiment score - based on CAPE adjusted equity risk premium and the VIX relative to their historical average and volatility

Source: Equitable Investors

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A custom ASX equity market sentiment score - based on the dividend yield spread on bonds and the ASX VIX relative to their historical average and volatility

Source: Equitable Investors

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A custom ASX small cap sentiment score - based on the dividend yield spread on bonds and realised volatilty relative to their historical average and volatility

 

Source: Equitable Investors

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A custom US debt market sentiment score - based on 10 year bond yield and MOVE Index of implied volatility relative to their historical average and volatility

Source: Equitable Investors

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Market price relative to US market bottom-up valuations from Morningstar

Source: Morningstar

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Market price relative to ASX market bottom-up valuations from Morningstar

Source: Morningstar

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Earnings: US Tech vs the Rest

Source: Topdown Charts

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Actual reported and bottom-up consensus EPS growth estimates

Source: Goldman Sachs Global Investment Research

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Enterprise Value / consensus sales - S&P 500 (IVV ETF) v US microcaps (IWM ETF)

Source: Koyfin

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Enterprise Value / consenus EBITDA - S&P 500 (IVV ETF) v US microcaps (IWM ETF)

Source: Koyfin

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Price / consenus EPS - S&P 500 (IVV ETF) v US microcaps (IWM ETF)

Source: Koyfin

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Country ETF performance over past 12 months (in USD)

Source: Koyfin

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No. of daily 10% swings per calendar year in the VIX (CBOE Market Volatility)

Source: Iress, Equitable Investors

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No. of daily 10% swings per calendar year in the S&P/ASX VIX

Source: Iress, Equitable Investors

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Personal Loans - 90+ Delinquency (#)

Source: Equifax

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Australian savings ratio

Source: RBA

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USA personal saving

Source: St Louis Fed

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Private markets should enter 2026 with a renewed sense of purpose. After a period of volatility and recalibration, the landscape has shifted in favour of long-term investors seeking resilience, diversification, and access to secular growth themes. 

From the growing role of private credit in corporate finance to the acceleration of digital and green infrastructure, the past year has underscored the strategic importance of private assets in modern portfolios.

The macroeconomic backdrop is evolving. Global growth has slowed but remains intact, and inflationary pressures are beginning to ease. Central banks are approaching the end of their tightening cycles, with some already pivoting towards more accommodative stances. This shift in monetary policy is improving financing conditions, and supporting deal activity and valuations across private markets.

Against this backdrop, our latest Private Markets House View outlines a cautiously optimistic outlook across the four major asset classes: private equity, private credit, infrastructure, and real estate. Each offers distinct opportunities, shaped by structural trends and regional dynamics.

Private equity: rebound and realignment

Private equity has staged a strong recovery, with deal-making regaining momentum as confidence returns to the market. Improved credit availability and greater alignment between buyers and sellers have helped restore activity levels. Valuations, which had softened during the previous downturn, have rebounded, reflecting both stronger financing conditions and a focus on higher-quality assets.

Thematic investing remains central to private equity strategies. Technology and healthcare continue to attract capital, driven by innovation and demographic shifts. Businesses that harness digital tools, automation, and artificial intelligence are particularly appealing. Meanwhile, sectors more exposed to economic cycles are being approached with greater caution, as investors prioritise resilience and long-term growth potential.

Looking ahead, private equity is expected to maintain its role as a key driver of portfolio returns. While macroeconomic risks persist, the combination of structural tailwinds and a disciplined investment approach positions the asset class well for the coming years. 

Private credit: filling the lending gap

Private credit has cemented its place as a vital source of capital, particularly as traditional banks scale back lending. In some regions, deal activity has been more subdued, reflecting recent market volatility and policy uncertainty. However, the underlying demand for private credit remains robust, with investors drawn to its income-generating potential.

In Europe, direct lending has been especially active. It is supported by structural trends, such as bank disintermediation and the continued appetite for flexible financing solutions. Lenders are focusing on smaller, mid-market transactions where pricing and terms remain attractive.

Credit quality has held up well, with lenders adopting more conservative structures to mitigate downside risk. As interest rates stabilise, the appeal of floating-rate instruments and the potential for enhanced yields continue to attract capital. Private credit opportunities are emerging in both traditional lending and more opportunistic strategies.  

Infrastructure: investing in the future

Infrastructure investment is thriving, fuelled by the global push towards digitalisation and decarbonisation. Capital deployment has accelerated, with strong interest in sectors such as renewable energy and digital infrastructure. These areas are benefiting from long-term policy support and growing demand for sustainable and connected solutions.

Investors are increasingly looking beyond traditional core assets, seeking exposure to opportunities that offer a blend of stability and growth. Core-plus strategies, which involve assets with modest development or operational risk, are gaining traction as they offer the potential for higher returns without sacrificing predictability.

The pipeline for infrastructure projects remains healthy, supported by public and private sector initiatives. As the energy transition gathers pace and digital connectivity becomes ever-more critical, infrastructure is set to remain a cornerstone of private market allocations.  

Real estate: a market in transition

Private real estate is showing signs of stabilisation following a period of adjustment. The easing of monetary policy is beginning to support valuations, and certain regions are experiencing a modest recovery. However, performance remains uneven, with outcomes varying significantly by geography and sector.

A clear polarisation is emerging within the asset class. Investors are gravitating towards high-quality, future-fit assets that align with long-term trends. Logistics and residential properties are in favour, driven by structural demand and limited supply. In contrast, traditional office and retail assets face ongoing challenges, with changing work patterns and consumer behaviour reshaping demand.

The focus is increasingly on assets that offer sustainability credentials, adaptability, and strong tenant demand. Value-add strategies, which involve repositioning or upgrading properties, are also gaining interest as investors seek to unlock value in a shifting landscape.

Final thoughts...

As we look to the year ahead, private markets offer a compelling proposition. Each asset class presents unique opportunities, underpinned by structural change and evolving investor needs. While selectivity and discipline remain essential, with improving macro conditions, private markets will continue to be a key driver of portfolio diversification and resilience.

Private markets have become a vital component of investors' asset allocation. By embracing innovation, sustainability, and long-term thinking, investors can position themselves to navigate uncertainty and capture the opportunities that lie ahead in 2026 and beyond.   

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While we apply a bottom-up stock picking process it is important to have a macro view overlay to guide us on portfolio construction. The rate of change, whether it is societal, geopolitical, or technological continues to increase exponentially and this argues for active management over passive. There are three key macro topics that we are watching particularly closely as we move towards 2026. The first is everyone's favorite topic of artificial intelligence (AI). The second is the overall health of the economy and what we expect to see from the Trump administration. And last but not least is private credit.

Why AI is not a bubble

First on AI, no, it is not a bubble. Yes, there will be some misallocation of capital and an ensuing market downturn sometime in the next five years just as we have seen with every new technology going back hundreds of years. We acknowledge the non-zero probability that large language models (LLMs) prove to be a dead end to true artificial general intelligence (AGI); however, we are also comforted by our meetings with companies that are citing use cases that are already driving significant costs savings.

We do not think AI is currently in a bubble, because ultimately it comes down to supply and demand. Unlike the commercial internet where you just dug a hole and laid some fiber, AI compute is infinitely more physically challenging to incrementally produce. To provide perspective, to produce a one-gigawatt (GW) data center that will run LLMs, it requires six football fields of land along with over 200,000 tons of equipment such as cables, heating, ventilation and air conditioning (HVAC), transformers, etc.¹ There are legitimate questions around if we even have enough electricity and skilled tradespeople to address a fraction of the tens of GWs of data centers that have been announced.

On the demand side, anecdotes suggest a waiting list of 20 different customers for each newly installed Nvidia graphics processing unit (GPU) at a data center. We will continue to pay close attention to companies addressing key bottlenecks (such as Nvidia, Prysmian, Schneider, ) that are acting as a governor on the adoption of AI. Further, we will continue to remain vigilant to AI exposed companies where valuations may be implying too optimistic of a scenario while also taking advantage of any irrational selloffs in AI exposed names. We feel that we are still early in the AI capital expenditure (capex) cycle and there is still significant outperformance to be had by investing in this space.

Running the economy hot: fiscal and monetary support ahead

On the topic of the U.S. and global economy, while there are certainly some wobbles in the consumer spending and confidence (particularly the bottom 80%) we expect significant fiscal and monetary support taking hold over the next five months. Indications are that Trump is going to run the economy hot through the mid-term election a year from now. We should expect significant tax refunds both for individuals and corporations in the first few months of next year due to the One Big Beautiful Bill (OBBB). We should also expect other initiatives from the Trump administration focused on bringing down costs in housing and healthcare along with the possibility of some form of helicopter money (US$2,000 has been floated as a giveaway to those making US$100,000 or less). Finally, we expect the U.S. Federal Reserve and U.S. Treasury to work in coordination and independently in bringing down interest rates and Treasury bill price volatility. All of this should be supportive of the economy and asset prices.

For the stock market, in the short term, liquidity is one of the biggest drivers of performance and we should expect other countries to get involved as well. We are starting to see signs that China will implement further initiatives to support the local property market while Japan is proposing the most Federal spending since the pandemic. All of this is probably inflationary and one of the best defenses is to own finite assets like equities. We have a bias toward investing in companies that help to drive efficiencies in society and are thus deflationary. In our view, these companies should do well in an inflationary environment.

With all of that said, next year is a mid-term election year which has historically brought about greater equity market volatility. The average peak-to-trough decline within the S&P 500 during an election year has been almost 20% going back to 1962. The good news is that these declines represent great buying opportunities as the 1-year return following these market troughs has averaged 31%. We again look forward to taking advantage of this volatility.

Exhibit 1: S&P 500 price return 12-month period following a mid-term election

^{Source: Strategas, as at 25 November 2025.}

Why we're steering clear of leverage in an uncertain credit landscape

Regarding the last topic of private credit, this may not be a story specific to 2026, but it is worth noting given the events around the First Brands and TriColor scandals this year.

Having gone through a couple of credit cycles in our careers, we have started to get a sense of déjà vu. What is different this time is that it appears that more of the risk has moved to cashflow-driven direct lending private credit and away from the banks (although banks may not be immune as roughly 10% of their U.S. loans are now to non-bank financial institutions). Unfortunately, given not all private credit is transparent, this means that the market will have much less early warning if something is wrong.

Private credit is of course not all created equal. Some private credit and private equity houses have historically boasted about their high sharpe ratios and low volatility in underlying asset prices. But in certain instances, this was a function of and not having to worry about marked-to-market valuations.

Some private credit houses have also enlisted other questionable strategies such as payment in kind (PIK) and maturity extensions. Banks have never had that privilege and thus we started to see warning signs on credit in 2006 and 2007.

What we find concerning in pockets of private credit, along with the above tactics, is the potential conflict of interest as it is estimated that between 70% and 80% private credit loans have the same private equity sponsor. We are starting to see credit risk increase with a recent example of Renovo, a private equity backed home improvement contractor that went bankrupt and reported only US$50,000 in assets versus US$150 million in private credit loans.

In 2026 there will be a need to look beneath the bonnet at the robustness of private credit processes, particularly in the diverse direct lending arena. In a scenario where there is a downturn in credit, investors will be well served by avoiding excessive balance sheet leverage and owning companies with mission critical products and services that tend to be more immune to economic downturns.

Conclusion: Be prepared to benefit from disruption

In an environment defined by accelerating change and heightened uncertainty, we believe there will be a clear need for disciplined bottom-up stock selection, combined with a thoughtful macro-overlay. This should be focused on identifying companies that are both resilient and aligned with long-term structural trends.

By actively navigating opportunities in AI, remaining vigilant on economic policy shifts, and avoiding any hidden risks in private credit, our aim will be to capitalize on volatility rather than be constrained by it. History shows that periods of disruption create some of the most compelling investment opportunities - and investors should be prepared to seize them.