Text on screen: PIMCO
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We think of the world across two vectors, AI and energy.
Text on screen: Pramol Dhawan, Emerging Markets
But if you want to build portfolios that are resilient across the AI and the energy theme, really there is no alternative other than to include emerging markets.
Firstly, the starting yield is a great advantage for emerging markets.
Full page graphic: Line chart titled “EM real yield is high for historical standards (%)” showing real yields from 2011 to 2025. Two lines are plotted: EM ex-China real yield (purple) and U.S. real yield (blue). EM ex-China real yields remain generally positive throughout the period, ending at approximately 4.03% in 2025. U.S. real yields fluctuate more significantly, falling to around -6% in 2022 before recovering and ending at approximately 1.30% in 2025. The chart highlights that emerging market ex-China real yields are substantially higher than U.S. real yields at the latest observation.
Starting levels of real yields are amongst the highest levels they've been when compared to developed markets. That really comes at a time when inflation, now excluding China, is below US inflation. But the real yields remain high despite the fact that inflation is low. And I think that's more of a function of proactive central bank reaction functions.
EM central banks hiked rates very, very quickly and they cut very slowly. In the developed markets, they do it diametrically opposite. They cut rates very quickly and they hike rates very slowly.
Images on screen: PIMCO trade floor
From a bond investor's perspective, that means that emerging markets central bankers are giving more of a dividend to international investors. That's your real yield cushion. And when that dividend is there, that's the best predictor of future returns.
Text on screen: 2/3rds of the global economy, Only 3-5% in portfolio allocations
Images on screen: São Paulo, Mexico City, Johannesburg
Two thirds of global economic output derives from emerging markets, yet portfolio allocations are somewhere around the three to 5% levels. Contrast that with the US where portfolios are anywhere between 70 to 75% allocated and the US comprising only 25% of global economic output. So there's clearly a convergence trade that is occurring there. The question is about the timing of the convergence and what catalyzes that convergence. We think we're in one of those catalytic events right now where increased geopolitical fragmentation is forcing people to think about idiosyncratic premiums once again.
Text on screen: Diversification at every level: Portfolio Managers > idiosyncratic premiums, Countries > energy and military independence, Corporations > diversified supply chains
Images on screen: PIMCO trade floor, solar panels, oil pipelines, shipping port, manufacturing assembly line
And whether it's diversification for a portfolio manager, which means more idiosyncratic premiums, diversification for a country, which means changing and adopting the sources of energy independence and military independence, or diversification from a corporate perspective, where you have to diversify your supply chains given that we're having the fourth supply shock in five years, diversification is really the buzzword at every single angle. And when we think about diversification within portfolios, we want to diversify from the US given the high starting positions, but not to give up yield.
Full page graphic: Venn diagram illustrating the investment case for emerging markets. The left circle is labeled “Diversification” with the text “Low correlation to U.S. assets.” The right circle is labeled “Yield” with the text “High yield advantage.” The overlapping center section is labeled “Emerging Markets,
Images on screen: Indonesia, India
When you think about that Venn diagram, emerging markets sits right at the center of that Venn diagram, high diversification and idiosyncratic premium, and high yield advantage versus the US.
Images on screen: PIMCO Trade floor
PIMCO is the largest lender in emerging markets, and we have over a hundred people covering emerging market debt across the globe, the largest team in the industry.
The real trick to emerging markets is not getting the macro calls right. It's getting the instrument selection, the security selection, right. We think that this is EM's time right now. But most importantly, this is a world environment, this is a fragmentation environment, which needs emerging market economies.
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Disclosure
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Diversification does not ensure against loss.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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