Asset management giant Carmignac Gestion SA, based in Paris, has issued a warning that traders should think twice before selling emerging market bonds, as significant capital inflows are poised to continue into this asset class. Alessandra Alecci, a portfolio manager at the firm overseeing approximately €37 billion (about $44 billion) in emerging market fixed-income assets, analyzed that emerging economies are demonstrating three key structural advantages. First, their economic growth rates continue to outpace those of developed economies. Second, leaders in some countries are showing stronger policy accountability. Third, monetary policies remain within a prudent framework, and overall debt levels are relatively manageable.

Growing expectations for US interest rate cuts are driving investors to seek higher-yielding opportunities in other markets, with funds tracking emerging market assets standing out as major beneficiaries. This week, while sell-offs in technology stocks and commodities impacted emerging market equities and some currencies, emerging market bonds remained largely unaffected. Notably, emerging market bonds denominated in major currencies delivered a remarkable 12.2% return last year, their best performance since 2012. Although replicating such stellar results this year may be challenging, Alecci asserts that the rally in emerging market bonds is far from over.

In an interview this week, Alecci stated, "Combine these flows returning for diversification purposes with very strong fundamentals—who would want to stand against that trend?" Currently, the yield premium investors demand for emerging market bonds over US Treasuries has narrowed to just 240 basis points, or 2.4 percentage points, the smallest spread since 2013. However, Alecci pointed out that many emerging markets still offer attractive interest rate conditions for carry trades. Here, she is referring to investors who borrow in low-interest currencies to invest in higher-yielding ones, profiting from the interest rate differential. She specifically cited Brazil, Colombia, and Turkey as examples. Alecci noted, "It's true that spreads have compressed, and in some cases, caution is warranted to avoid risks, but there are still numerous countries offering quite substantial yields."

Emerging market bonds represent pockets of undervalued opportunity, according to Alecci. The broad-based rally in commodities will continue to provide solid support for demand for emerging market debt. She emphasized, "Many emerging markets are producers of metals that play a crucial role in the AI revolution and the green transition. In my view, this positive dynamic will persist." Within Carmignac's portfolio, Alecci highlighted local currency bonds from Hungary. She believes that following the parliamentary elections in April, Hungary has significant potential for "groundbreaking changes," and the central bank currently has room to implement interest rate cuts.

Alecci also revealed that Carmignac has invested in Romania, noting that the country has implemented "quite significant" improvements in its public finances. The portfolio manager further indicated that frontier markets like Ivory Coast, Benin, and Egypt, as well as Uzbekistan, a major gold producer, also present attractive investment value. Alecci concluded, "If you examine the fundamentals of some of these investment targets, they are actually very solid. The market's positive reception of these assets is itself highly encouraging and is even sparking a wave of optimism across other market segments."