Finding relative value in emerging markets debt

Resilient equities defy doom and gloom scenarios. A defining feature of recent trading in U.S. equity markets has been resilience, supported by a combination of tempered geopolitical fears, a strong start to corporate earnings season and positive momentum for the AI narrative. After a bruising first quarter, U.S. stocks spent the first half of April not only absorbing the shock of the Iran conflict, but also reversing their declines. The S&P 500 Index, down -4.3% in Q1, roared back to new all-time highs last week. Potential de-escalation in the Middle East and renewed diplomatic engagement buoyed market sentiment after the prior weekend’s disappointing ceasefire talks. Initial inflation and growth scares from the oil supply disruption have been reframed as temporary turmoil rather than as structural impairments.

The Producer Price Index (PPI), a measure of inflation at the wholesale level, came in at 0.5% for March (Figure 1) and 4.0% year-over-year — both below expectations given the spike in energy prices, offering cautious optimism for March’s yet-to be-released consumer inflation data. That said, higher energy costs are not to be overlooked. The energy component of PPI surged close to 9% in March, and overall PPI was at its highest year-over-year level in more than three years.

Meanwhile, perceived geopolitical relief and tempered inflation scenarios have been amplified by healthy corporate earnings. Analysts expect year-over-year earnings per share (EPS) growth of roughly +13% for the first quarter, which would mark the sixth consecutive quarter of double-digit increases. For 2026 as a whole, consensus earnings growth estimates are +18%, according to FactSet.

AI remains a foundation of market resilience as it evolves from a theoretical to a measurable earnings driver. The information technology sector alone is expected to contribute more than 80% of the S&P 500’s first quarter EPS expansion. And more company earnings calls are citing tangible AI-related impacts on revenue, margins and capital deployment — providing a structural tailwind that helps markets look through episodic volatility.

In fixed income markets, U.S. Treasuries are sending a more balanced signal. The 10-year Treasury yield has been relatively range-bound at 4.25%–4.30%, while the 2-year yield is closer to 3.80%–3.85%, leaving the curve modestly upward-sloping by roughly 50 basis points. This reflects expectations for steady growth and gradual disinflation, as well as a U.S. Federal Reserve that remains on hold for now.

This week’s U.S. economic calendar — including retail sales, housing data and the final April University of Michigan consumer sentiment reading — should further clarify that balance. It also serves as a reminder that investors may benefit from broadening their asset allocations amid shifting equity performance, evolving inflation dynamics and AI-driven earnings momentum.

Portfolio considerations

Emerging markets debt remains a favored allocation despite a difficult first quarter. War in the Middle East drove risk-off sentiment, widening spreads across fixed income and pushing Treasury yields higher. Local markets, represented by the JPMorgan GBI-EM Global Diversified Composite, were hardest hit, returning -2.3% for the quarter as the U.S. dollar strengthened against EM currencies and the Fed leaned hawkish. A bright spot was strong investor demand for EM debt, evidenced by positive net fund flows of $17.4 billion.

Despite the challenging environment, the asset class remains among our favored allocations in diversified portfolios. Fundamentals are still quite healthy overall: EM high yield corporate defaults are lower than in prior years, despite having ticked up to 4.0%, according to JPMorgan data. The projected default rate for EM high yield sovereign bonds is less than 1% for 2026, well below its 7% five-year and 2% longer-term averages.

EM sovereign debt as a whole offers a risk premium and relative value versus historically tight developed markets credit spreads. We see opportunities in countries such as Kazakhstan, Guatemala and Poland. Given tight valuations, we remain underweight the Middle East and Gulf Cooperation Council countries. Among EM corporates, we prefer steady issuers (Mexico, Chile, Brazil, Colombia and South Africa), where corporate and quasi-sovereign opportunities provide a premium to similarly rated developed markets peers (Figure 2). A benign inflation outlook and global diversification trends support EM local debt. And while we believe the dollar’s recent firming is a short-term headwind for local markets, we expect beneficial downward pressure on the U.S. currency in the medium-to-long term.

Still, we’re mindful of inflation pass-through effects and the downside risks that an escalating Middle East conflict poses to global growth, risk sentiment and currency dynamics. Allocations to countries such as South Africa and Brazil may be especially attractive, as these countries have kept real rates high to counter increased inflation expectations.

Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

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• macro and asset class views that gain consensus among our investors
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