What is driving EM corporate debt outperformance?

Emerging market (EM) corporate debt has delivered robust returns year-to-date (YTD) and has outperformed its developed market (DM) counterparts. The leading benchmark for EM corporate bonds – the JP Morgan CEMBI (Corporate Emerging Market Bond Index Broad Diversified index – shows that EM hard currency corporate bonds have outperformed both US and European high yield and investment grade indices YTD in 2025. It is notable that this outperformance has taken place amid a sharp rise in global trade tensions, as well as a material drop in oil and gas prices – both factors which could be expected to weigh on key export-heavy EM countries. What factors are at play and where do we see value?

Diversity and technicals are behind the outperformance

The EM corporate bond space has undergone a significant transformation over the past 15 years. It was previously viewed as a niche market dominated by Chinese issuers and commodity exporters (led by energy) but it has diversified and developed. The asset class has more than tripled in size since 2010 and now encompasses a wide range of geographies and sectors. Almost 60% of the segment is now classified as investment grade debt, and no single country accounts for more than 6% of the index (including China), while oil and gas holds just 12% of the overall weighting. Market technicals have also been a tailwind. Despite the YTD pick-up in supply, EM corporate bond net supply has been negative since 2022 while EM dedicated funds have seen inflows.

Spreads are tight but yields are still attractive

Spreads are currently near the tights previously seen in the aftermath of the 2008-09 Global Financial Crisis, similar to developed markets (DM). However, yields remain attractive outright, relative to both the 10-year average and to DM corporates. EM corporate bond issuers are offering higher yields despite being predominantly top quartile producers in their industries with materially lower leverage than their DM counterparts. 

Average EM high yield net leverage stood at just 2.7x at the end of Q2 2025, comparable to levels of leverage for DM investment grade. This is materially lower than the 3.6x for US high yield and 4.9x for the European equivalent. EM investment grade leverage remains near all-time lows at 1.1x. 

Security selection is key to performance

The strong fundamentals of the asset class do not, however, make it immune to idiosyncratic headwinds. The bursting of China’s property bubble in 2021 had a negative impact on index total return in 2021 and 2022. Both 2022 and 2023 were affected by the ongoing Russo-Ukrainian war. More recently, Brazil’s corporate bond market has been hit by a series of credit issues related to idiosyncratic problems at two high-profile issuers. 

We remain cautious on the outlook for several sectors. Chemicals, in our view, is hampered by a number of long-term structural weaknesses. We have a negative outlook for oil prices and we are also concerned with some of the production issues associated with several smaller, independent oil and gas producers. Consequently, we are less positive on the outlook for the oil and gas sector, with the exception of select quasi-sovereigns in Latin America that have a degree of state backing. Finally, we believe consumer durables will be negatively impacted by competition from China. Chinese exports that have been displaced by US President Donald Trump’s tariffs programme are now flooding into some EM countries.  

We remain positive on the outlook for several sectors. Financials look set to benefit from the continuation of the rate-cutting cycle in both the US and across emerging markets, which stands to boost net interest margins and support asset quality. Saudi Arabian Tier 2 (subordinated) debt offers particularly attractive spreads relative to senior debt. We are constructive on precious metals. Gold in particular looks set to perform well as we expect to see continued demand from central banks and the wider market. Additionally, copper is suffering from a structural shortage in the medium term, given a shortage of new mines, and we anticipate demand exceeding supply. This presents an opportunity, in our view. We also see a number of bright spots in telecoms, in light of select providers undergoing successful deleveraging efforts. 

We believe EM corporates can continue to deliver attractive returns, offer diversification and contribute alpha to EM sovereign benchmarked portfolios as well as DM portfolios. We maintain that active management – combining rigorous bottom-up analysis with careful security selection – is vital to navigate the various opportunities and challenges inherent in the asset class.