Investors have historically perceived emerging market debt (EMD) as a volatile or overly risky asset class. This has seen it largely shunned, with investors quick to offload EMD positions at the first sign of market turmoil– as evidenced by the serious damage inflicted on the sector during 2013's ‘Taper Tantrum'. However, new research from Allianz Global Investors suggests these perceptions are outdated and fail to reflect how EMD has evolved as an asset class.
EMD: Challenging the common assumptions
"The idea that EMD is too concentrated, illiquid or just too risky, is really quite misplaced," explains Giulia Pellegrini, lead portfolio manager of EMD at Allianz Global Investors. "What we have seen in the last 30 years alone is a real evolution and expansion on the opportunity set of emerging markets."
The group's most recent paper, ‘Dispelling Myths in Emerging Market Debt,' was penned by Pellegrini and Evangelia Pournara, senior product specialist in Allianz Global Investors' EMD team. The paper delved into data of how the asset class has evolved to take an objective view and reveal how the asset class had deepened, with now over 70 countries offering such securities.
Specifically, the paper highlighted the role emerging market policymakers have played in helping to grow these economies while being fiscally responsible during the pandemic.
You've seen debt to GDP ratios becoming a lot healthier in emerging markets versus developed markets," adds Pellegrini. "The position some of these policymakers have reached is now giving them a buffer they can use to stimulate their economies essentially."
EMD vs the rest of the world
A deeper and maturer EMD market has also allowed the asset class to generate attractive returns for investors, with some emerging markets – particularly on a local currency basis – outperforming developed markets in 2025. Though this has been a surprise to some, Pournara points to how EMD has fared against a weakening dollar. She says policy decisions from the US, largely in the form of trade tariffs, have "put dollar supremacy in question."
Though she does not see this signalling an end to the dollar's pre-eminent global currency status, Pournara sees local currency EMD being in a good position to benefit from further weakening.
We think the Federal Reserve will have some concern about US growth and is better disposed to cut interest rates to stimulate the economy because of recent pronouncements by the White House," explains Pournara.
"All of that essentially opens up the path a lot more for emerging market local currencies because when you have a weaker dollar, [these] are likely to perform much better."
Finding opportunities and avoiding defaults
Though bullish on EMD prospects, the pair argue that the increasing size of the asset class warrants a selective approach. Negative perceptions of EMD are still coloured by high profile defaults in the past such as Mexico in 1994 and Argentina's on multiple occasions. Pournara says these have stuck in investors' minds, but she stresses that EMD is now better placed to withstand singular shocks.
"We had a recent example in Argentina when [President] Milei underperformed in the local elections and the country's bond prices fell, but that did not affect the rest of the asset class," says Pournara. "It's a key characteristic that there's no longer contagion into the entire Latin American market, or the entire EMD index, which shows how the asset class has matured."
Allianz Global Investors has been able to avoid notable defaults through the years, which the pair attribute to in-depth macroeconomic research. This means being able to pick and choose within the expanding EMD universe, while incorporating ESG criteria into these decisions which Pellegrini sees as crucial.
"We believe that environmental stewardship, social responsibility and good governance are building blocks for a resilient portfolio in EMD," says Pellegrini. "Success in EMD relies on an active management approach, allowing asset managers to pick the winners or avoid the losers.
"This means having no fear of a high conviction approach - you hold zero weight in a country that you have less conviction on, with just exposure in those you believe are on the right direction of travel."
For more information, please visit Allianz Emerging Market Debt Fund Focus | Allianz Global Investors
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