William Blair Sees Strong Potential in Emerging Market Local Currency Bonds, Highlighting High Yields and Low Correlation

Marcelo Assalin, Head of Emerging Markets Bonds at William Blair, and portfolio manager Lewis Jones recently visited Taiwan to analyze market prospects. William Blair anticipates that the U.S. Federal Reserve will hold interest rates steady this year, with the next phase likely to resume rate cuts rather than hikes. Emerging markets are demonstrating strong economic resilience, with average growth projected to exceed that of developed countries by 2 percentage points. Coupled with rising demand for raw materials driven by the AI boom, the outlook remains positive. In the face of global market volatility, the team is promoting strategies focused on emerging market local currency bonds and frontier markets, leveraging high real interest rates and low correlation to help investors build portfolios that offer both risk diversification and value appreciation.

Assalin noted that emerging markets are expected to maintain an average economic growth rate of around 4%, significantly outpacing developed economies (with a growth gap of approximately 2 percentage points). Historical trends show that when the growth differential between emerging and developed markets widens, it typically attracts substantial capital inflows into emerging markets.

Moreover, as global capital expenditure in artificial intelligence (AI) surges, emerging markets—key suppliers of energy, metals, precious metals, and rare earths—stand to benefit significantly from rising prices and export growth. This not only supports trade surpluses and fiscal stability in these countries but also helps keep debt-to-GDP ratios within manageable levels.

On investment strategy, Assalin emphasized that traditional emerging market local currency bond benchmarks are overly concentrated, with the top 10 countries accounting for 80% of the index, and Asian low-yield countries making up about 50% of the weight, limiting the potential for long-term excess returns.

In response, William Blair’s investment team has expanded its scope to include 48 emerging and frontier countries beyond the benchmark, including Nigeria, Egypt, Kazakhstan, Serbia, and Argentina. Assalin highlighted three key advantages of frontier market bonds: first, average interest rates are significantly higher than those in developed and traditional emerging markets; second, they exhibit low or even negative correlation with global equities and U.S. Treasuries, making them less vulnerable to systemic global risks; third, historical data shows frontier markets experience smaller drawdowns during market downturns and deliver superior long-term cumulative returns compared to traditional emerging market bonds.

In risk management, William Blair employs a strict, combined “top-down” and “bottom-up” discipline. Tracking error volatility is kept within a safe range, with individual frontier country allocations typically limited to 0%–1%. Risk is balanced through a diversified portfolio spanning high-beta, low-beta, and frontier markets.

The current strategy portfolio comprises approximately 200 securities, with an average credit rating at investment grade (about 85% sovereign bonds, over 10% high-rated multilateral institution bonds). The yield to maturity is close to 8.5%, significantly outperforming market benchmarks by nearly 200 basis points.

Looking ahead, Assalin expects the Fed’s next policy phase to remain focused on rate cuts, and anticipates geopolitical risks to gradually ease ahead of the U.S. election, further alleviating inflationary pressures from energy prices.