Investors Seeking New EM Frontiers Switch Global Risks for Local
March 23, 2025
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(Bloomberg) — The rally in emerging-market local-currency bonds is getting more exotic, as investors seek to shield themselves from US-induced risks by venturing deeper into lesser-known frontier nations.
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William Blair has bought bonds in Jamaican dollars, Dominican Republic peso, Pakistani rupee, and Zambian kwacha. Meanwhile, AXA Investment is holding securities in the Kazakh tenge, Ninety One is mulling Ugandan shilling notes, Pinebridge is evaluating Uzbekistani soum bonds, and BlackRock Inc. has added Serbian dinar debt to its portfolio.
Money managers are increasingly making off-benchmark allocations, leaving currency risk unhedged as they seek the juiciest yields fixed income has to offer. They’re targeting markets that are relatively insulated from the global economy, with investment opportunities led by local drivers like growth, reforms, or high interest rates.
“We have a combination of what we view to be very undervalued currencies with very high carry, very high interest rates,” said Marcelo Assalin, who heads William Blair’s emerging-market debt team. “They tend to be uncorrelated to global markets, and that’s the beauty of it.”
In the past, investors diversifying into frontier nations often bought sovereign dollar bonds to avoid exchange-rate risks and stuck to names in benchmark indexes. That’s changing, with investors going further off-grid in search of high yields and a hedge against global turmoil.
But there’s a trade-off: they’re swapping global risks — like Trump’s mercurial tariff policies — for local perils. These under-the-radar markets typically have low liquidity and can trap investors in case of a sudden downturn. Unexpected political and economic events can turn gains into losses overnight. Their tiny sizes also limit the scope of the investment opportunity.
“You need to be picky and you need to be doing your research because these markets are less known, less well covered,” said Aurelie Martin, an economist and investment analyst at Ninety One in London.
Portfolio Mix
To be clear, fund managers making these unconventional bets aren’t turning their backs on mainstream emerging markets.
In fact, local-currency bond gains so far this year are being led by the bigger countries. Brazil, Mexico and Chile have delivered double-digit returns, sending Bloomberg’s benchmark for the asset class to its best start since 2023. High-yielding nations such as Egypt, where interest rates north of 20%, are luring carry traders.
In comparison, returns from lesser-known frontier markets have been modest. The iShares JPMorgan EM Local Currency Bond ETF, which has smaller-nation securities among its top-10 holdings, is up 4.3% since the start of 2025. That’s more than twice the gains in the Bloomberg EM Local Currency Government Universal Index, but far less than, say, Brazil, where investors earned 16%.
Still, the case for stepping off the beaten path lies in diversification, according to Magda Branet, head of emerging markets and Asia fixed income at AXA Investment Managers UK.
Isolation Appeal
With minimal correlation to global markets, frontier nations can escape market contagions — a potential advantage at a time when investors anticipate a volatility surge in the months ahead.
“When you go into frontier markets, you’re not really playing the global dollar weakening theme,” said Branet. “You have to like the currency in order to go into the trade.”
Branet, whose fund holds tenge bonds in Kazakhstan, said she didn’t hedge for the currency risk as that would eat into the carry returns.
Currently, larger markets like Brazil are outperforming due to a weaker dollar. If the greenback rallies again, it could spark large outflows. In contrast, funds expect substantial yields in frontier markets that can offset potential currency losses while still delivering profits.
Juicy Yields
Uzbekistan, for instance, offers a 17% coupon on its September 2034 soum-denominated bond. Pakistan’s 10-year rate is 10.5%. Kazakhstan’s March 2035 note carries a 10.25% interest, while Jamaica’s five-year security pays 11.875% annually.
“We see reform momentum and improving credit fundamentals,” said Joseph Cuthbertson, sovereign analyst at PineBridge Investments, referring to Uzbekistan. “The currency is on a credible crawling peg, and the bond yields are attractive after adjusting for any FX depreciation.”
Yet, the risk of a sharp currency loss is never far away. The political flare-up in Turkey underscores how well-laid investment cases can unravel even in mainstream emerging markets. Turkey formally arrested President Recep Tayyip Erdogan’s main political rival on Sunday.
“It’s a question of being a bit more disciplined and more clear minded than usual,” AXA Investment’s Branet said.
What to Watch
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EM investors will be watching out for headlines on Ukraine peace talks, Lebanon bond restructuring, fresh fighting in Gaza and Turkey’s attempt to restore investor confidence after a political flare-up
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Eastern European monetary policy will be in focus, with Hungary deciding on Tuesday and Czech Republic announcing its move on Wednesday. Rates are expected to be on hold in both countries
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Mexico’s central bank may reduce its overnight rate by 50 basis points on Thursday.
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Brazil’s central bank will publish its meeting minutes and quarterly monetary-policy report
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On Friday, S&P Global Ratings will announce its credit-grade decisions on the Czech Republic, Morocco and Oman; Moody’s will rate Mozambique, Fitch will decide on Kosovo
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Sri Lanka may leave its policy rate unchanged on Wednesday as deflation is seen as temporary
(Updates with developments in Turkey in penultimate paragraph)
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