CONTRIBUTORS
Nicholas Hardingham, CFA
Portfolio Manager, Franklin Templeton Fixed Income
Stephanie Ouwendijk, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Robert Nelson, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Joanna Woods, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Sterling Horne, Ph.D
Research Analyst,
Franklin Templeton Fixed Income
Carlos Ortiz
Research Analyst, Franklin Templeton Fixed Income
Jamie Altmann
Research Analyst, Franklin Templeton Fixed Income
Summary
The past year has proved considerably more supportive for emerging markets than we expected at the outset. We started the year with concerns about the direction of US trade, immigration and foreign policy, and the challenges these changes would pose for emerging markets (EM) in terms of growth and investment. And indeed, we have had a year of substantial change in US trade, immigration and foreign policy. As we discuss in this paper, we find ourselves entering 2026 with a decidedly better macro environment for EM and an asset class that has proven far more resilient to disruption and more capable of positive reform than we expected to see at the start of the year.
Our base case for 2026 is a broadly constructive one. On the sovereign side, we anticipate some space for further spread tightening on credit-enhancing fiscal and economic reforms, and we expect to see a macro environment that continues to be supportive, while on the corporate side we see a more balanced fundamental outlook leading to a continuation of the range trading.
We acknowledge a key risk to that outlook is the potential for missed expectations in artificial intelligence (AI) development and infrastructure investment or further stressors emerging within private credit markets (or both) to disrupt risk sentiment. But even so, we see a strong case for a sustained stretch of positive reform momentum to underpin relative resilience in EM debt.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt.
WF: 7794613
