After emerging markets delivered their strongest returns in almost a decade in 2025, Switzerland's Union Bancaire Privée explains why it is positive about emerging market debt as an asset class in 2026 despite geopolitical tensions.

Once seen as the risky end of the investment spectrum, emerging markets have been through something of a "vibe shift".

Thomas Christiansen (pictured), head of emerging markets fixed income at Swiss private bank Union Bancaire PrivĂ©e (UBP), highlighted in an interview with this news service last week that a multitude of factors have contributed to the increased attention to emerging markets recently.

“We have had years of outflows from emerging market debt in 2022, 2023 and 2024. A lot of people have been underweight in the asset class, but we saw a shift last year,” Christiansen said. “We had significant inflows in 2025 in local currency and some hard currency in the second half of the year. But this doesn’t compensate for the outflows previously seen.”

“In those years, we have seen an improvement in emerging market credit worthiness in terms of fiscal and monetary policy. There has been prudent fiscal management in these countries while France and US last year were downgraded on the developed market side,” Christiansen continued.

There has been a clear improvement in emerging market fundamentals. There hasn’t been a single sovereign default in emerging markets since 2022. All these things – a backdrop of underinvestment, an improvement in fundamentals, and a move away from US exceptionalism – have contributed to the increasing attention to emerging markets,” he continued. “How much is due to volatility and how much is due to US President Donald Trump wanting a weaker dollar to address the trade deficit to make the US more competitive is unclear. But it all makes a bit of a tailwind for emerging markets. In fixed income, assets are expensive. This year and last year, people are looking for carry and decent returns from fixed income and emerging markets stand out on that. All these things make a ripe environment for emerging markets in portfolios.”

“UBP did increase its allocation to emerging market debt last year and early this year,” Christiansen said.

No longer the riskiest option
Emerging markets have at times been seen as the riskier end of investment. But with developed countries roiled by populism, arguments about tariffs, concerns about sluggish growth (in Europe) and more, emerging markets are seen as ways to reduce risk in portfolios as well as to enhanced returns. 

Christiansen picked up on this point. “The volatility of emerging market currencies today is lower than G10 currencies. The volatility of sovereign and corporate debt over the last five to 10 years is in line with US fixed income but with better returns,” Christiansen continued. “The lack of defaults is also causing perceptions to shift. Emerging markets are not perceived as risky as they were. Also the economy in emerging markets is improving – around 80 per cent of global growth is driven by emerging markets. There are many reasons why investors are revisiting their emerging market portfolios.”   

“This year, given the tight spread levels across all fixed income assets, we favour where most yield for the least level of volatility can be found. We like stable credits that are high yielding,” he continued. "So on the hard currency side, places like Cote d'Ivoire, Benin, which are really well managed economies, fast growth, well diversified. But at the asset class level, we also have a clear preference for frontier currencies.”  These include Ghanaian Cedi, Zambian Kwacha, Nigerian Naira, Egyptian pound, Ugandan shilling. “These are currencies that offer relatively good carry for low levels of volatility. Levels of volatility are much lower than what people might expect simply from hearing the names of the countries,” he added. He is not particularly involved in Taiwan or Korea, but he is involved in Malaysia.

Christiansen also said that many emerging markets, notably Brazil, are benefiting from the tariff overturn since the US Supreme Court’s ruling. “Higher tariffs are seen in the developed world. There is also the relative impact – we didn’t see global recession last year when tariffs first came out and we don’t see one this year. Emerging markets also do a lot more trade with China now than with the US. China is a hugely important trade partner for emerging markets. Data has also shown some investors re-allocating their investment from the US to emerging markets,” he added. 

Outlook
However, Christiansen doesn’t expect the same level of returns this year as he saw last year, especially on the hard currency side, where mid double digits were seen. “I don’t think it is repeatable but returns will still be attractive,” he said. On hard currency, sovereign corporate debt, he sees mid to high single digits. On local currency, it could be more, depending on the dollar strength while on frontier markets, it could be low double digits.

 A number of wealth managers have been stepping up exposure to emerging market equities and emerging market debt in 2026. Benjamin Melman, global chief investment officer at Paris-headquartered Edmond de Rothschild Asset Management, for instance, has increased his exposure to emerging markets recently. However, Sonal Desai, chief investment officer of FranklinTempleton fixed income highlighted this week that the resilience of emerging markets (EM) will be tested, as a result of the Iran conflict which sent oil prices up and saw the dollar strengthen.

“Here we might see the strongest impact after a very strong start to the year in emerging market assets. This crisis will likely underline again the divide between oil exporters and oil importers, with the latter in a much more vulnerable position. Emerging market assets will likely now feel the effects of the dollars’ strength and potentially higher US interest rates against the backdrop of higher oil prices,” Desai said. See more coverage here and here.