Emerging market (EM) corporate debt is attracting renewed interest from European institutional investors as improving fundamentals, attractive yields, and diversification benefits challenge long-standing perceptions of risk.
Misconceptions regarding emerging markets debt stem from how the asset class is defined, according to Jean-Yves Chéreau, co-portfolio manager at London-headquartered independent asset manager J. Stern & Co. When investors read about emerging markets, they often think first of equities, sovereign debt or local-currency exposure. J Stern team focuses instead on bottom-up research for stock or bond picking in corporate debt and hard currency.
Perceived risk remains the biggest barrier to adoption, but data tell a different story. Chéreau said: “If you compare emerging market high yield with US high yield, default rates have been broadly in line,” citing analysis based on Bank of America and JP Morgan data, adding that leverage levels are also lower. According to J. Stern & Co., over the past three years the asset class has delivered returns of about 8.5% with relatively low volatility, offering what he described as a compelling risk-return profile.
Emerging market corporate debt has historically delivered strong returns with lower volatility than mainstream alternatives and currently yields roughly 1.5 percentage points more than US high yield, based on firm data comparing its strategy yield with iShares US high yield ETF data as of February 2026. Yet institutional investors typically allocate only 1–3% of fixed-income portfolios to the asset class, compared with 7–10% to US high yield (State Street data). The hard-currency EM corporate bond market rivals the size of the US high-yield market, with JP Morgan estimating it at around $2.5trn compared with approximately $1.3trn for US high yield.
Charles Gélinet, co-portfolio manager, said allocations are beginning to rise as investors reassess diversification opportunities. “Over the past 12 to 18 months people have started to take note,” he said, pointing to improving fundamentals and a weaker US dollar encouraging investors to look beyond domestic markets. Both top-down growth dynamics and improving corporate leverage have contributed to the shift, he added.
From a portfolio perspective, EM corporate debt can serve multiple roles for European investors. The J. Stern strategy targets total returns of around 8% with income yields near 7.5%, providing a meaningful buffer and visibility on cash flows. The broader asset class spans more than 1,000 issuers across over 60 countries, offering diversification benefits and moderate correlation with equities. The strategy’s volatility has been around 3% since inception, significantly lower than equity markets.
“For example, on “Liberation Day” US equities fell by roughly 20%, while the strategy declined by about 1.5%. A similar pattern was observed during the Lehman Brothers collapse, when US equities dropped around 50% and the strategy fell approximately 17%, illustrating comparatively lower drawdowns in severe market downturns,” said Chéreau.
With valuations tighter in parts of the market, the strategy is positioned defensively, favouring non-cyclical sectors such as consumer staples, communications and industrials where earnings visibility is stronger. Exposure is concentrated in senior secured and senior unsecured debt, the safer parts of the capital structure, shared Gélinet.
A defining feature of emerging market corporate bonds is the “sovereign ceiling”, under which corporate ratings — and often their pricing — are constrained by the credit rating of the country where they operate. Chéreau said this can penalise fundamentally strong businesses, as investors demand a country risk premium even when company fundamentals are robust.
As a result, issuers of comparable quality may yield around 7–9%, versus roughly 3–4% for developed market peers. He described this as “a structural opportunity”, allowing investors an opportunity to increase exposure and “crystallise the credit spread” embedded in yields.
Supply-chain shifts and China’s slower growth have had a limited direct impact on the strategy, although near-shoring trends have supported countries such as Mexico, added Gélinet.
Gélinet said the breadth of emerging markets helps cushion macro shocks, noting that “you need something substantial” to materially affect the asset class.
While a weaker US dollar has historically supported returns, he noted performance has been generated across different dollar cycles over the past 25 years. The key reason, he argued, is that many emerging market economies are “much better shaped” than in the past and in some cases compare favourably with developed peers.
