The United States’ tariff announcement on April 2, 2025, created significant market volatility, as the tariffs were perceived as higher, broader, and more punitive than expected, and the implementation sooner. Since then, the tariff war with many countries has de-escalated, but uncertainty is keeping market volatility alive. On the bright side, we believe the market selloff has provided investors with attractive opportunities to increase allocations to emerging markets (EM) debt.
1. No Shift in Base Case
While policy risks have risen, our outlook is unchanged. We expect a global slowdown—not a recession—and believe disinflation will continue, giving central banks room to normalize policy gradually. As a result, we still expect a slow but steady improvement in global liquidity. And EM debt performance is generally driven by global growth and liquidity.
2. EM Resilience
EMs appear better positioned than many developed markets to weather a global trade war, thanks in part to the rise of intra-EM trade, which has reduced direct exposure to U.S. tariffs.
3. Pivoting in China
In China, we expect a mix of monetary and fiscal stimulus, alongside currency weakening, as the government works to cushion the impact of tariffs. China is also likely to accelerate its pivot away from U.S. exports. EMs now account for nearly half of Chinese outbound trade, and that could increase as it expands trade with both EM and developed market partners.
4. Strong Fundamentals, Supportive Technicals
EM debt fundamentals remain solid, with a healthy growth premium over developed markets likely to persist through 2026, in our opinion. Sovereign credit risk appears contained, with no new defaults expected over the next year, leaving EM credit on stronger footing than its developed market peers. On the technical side, we expect continued support from limited net new issuance in 2025, even amid near-term uncertainty over investment flows.
5. Compelling Valuations
Recent credit-spread widening has improved valuations, particularly in high yield, where spreads now sit above long-term averages, so we remain positioned for compression of high-yield and investment-grade spreads. Despite concerns over inflation from potential tariffs, our positive outlook for the 10-year U.S. Treasury yield is unchanged. We see an opportunity for investors to add long-duration exposure to lock in attractive real and nominal yields.
Marcelo Assalin, CFA, partner, is the head of William Blair’s emerging markets debt team, on which he also serves as a portfolio manager.
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