You are currently viewing the United States website Institutional website. You can change your location here or visit other RBC GAM websites.

Welcome to the RBC Global Asset Management site for Institutional Investors

In order to proceed to the site, please accept our Terms & Conditions.

This RBC Global Asset Management (U.S.) Website is intended for institutional investors only.

For purposes of this Website, the term "Institutional" includes but is not limited to sophisticated non-retail investors such as investment companies, banks, insurance companies, investment advisers, plan sponsors, endowments, government entities, high net worth individuals and those acting on behalf of institutional investors. The Website contains information, material and content about RBC Global Asset Management (collectively, the “Information”).

The Website and the Information are provided for information purposes only and do not constitute an offer, solicitation or invitation to buy or sell a security, any other product or service, or to participate in any particular trading strategy. The Website and the Information are not directed at or intended for use by any person resident or located in any jurisdiction where (1) the distribution of such information or functionality is contrary to the laws of such jurisdiction or (2) such distribution is prohibited without obtaining the necessary licenses and such authorizations have not been obtained. Investment strategies may not be eligible for sale or available to residents of certain countries or certain categories of investors.

The Information is provided without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute investment, tax, accounting or legal advice. Recipients are strongly advised to make an independent review with an investment professional and reach their own conclusions regarding the investment merits and risks, legal, credit, tax and accounting aspects of any transactions.

Accept Decline
May 12, 2023

Polina Kurdyavko hits the road, reflecting on her observations from around the world while tying in fresh investment perspectives related to emerging markets. For investors that are both armchair travelers and road warriors, these insights will open your eyes to the opportunities abroad. Subscribe to receive her latest note.

Have you ever fallen in love? The feeling of happiness and euphoria provides plenty of scope for optimism and long-term planning. Yet the challenge lies in making the transition from this highly emotional state to one of long-lasting love. Patience, compromise, communication and commitment are key.

Key points

  • Emerging market debt yields are at a 20-year high, but investor’s interest is at a crossroads
  • Focus may evolve into a longer term, more constructive allocation
  • Shift in attitude is bolstered by more orthodox monetary policy and geopolitical realities
  • Investments are often based on trust and this will continue to develop as emerging market countries improve their institutions

Investors have certainly been falling in love with the carry that emerging market fixed income investments have to offer. The yields of both the hard currency and the local currency fixed income indices are trading close to their 20-year highs, in many cases, reaching double-digit levels. The increase in risk appetite for emerging markets can also be seen in the reversal of flows since the beginning of the year with emerging market (EM) fixed income registering USD2 billion inflows year to date, albeit lagging inflows to the EM equity and US investment grade (IG) debt markets. The key question remains whether this trend is a tactical phenomenon or a structural shift.

Investors have certainly been falling in love with the carry that emerging market fixed income investments have to offer.

There are certain elements that point in the direction of structural long-term changes. In addition to monetary policy orthodoxy and a supportive commodity price environment, we are also witnessing an interesting geopolitical reshaping of the world. The lukewarm relationship between the US and China is unlikely to improve in the short or even the medium term. However, given the interlinkages between the two countries, we are equally unlikely to see a sharp deterioration in the economic activity between the world’s two largest economies. What does this mean for the rest of emerging markets? In our view, the current geopolitical situation presents several advantages for large emerging market economies such as India, Indonesia, Brazil, Mexico and Chile to name a few.

In the new geopolitical order, these allies become strategically more important. Given the ongoing Russia-Ukraine war and tensions between the US and China, the West needs as many allies among emerging market countries as possible. This is an opportunity for these emerging markets to change the rules of the game and dictate their terms when it comes to trade deals, portfolio flows and the level of tolerance vis-a-vis policy conduct in particular jurisdictions. Does a structural shift in positioning for these emerging market economies concerning their geopolitical stance also translate into portfolio flows? A few months ago, in a piece called ‘Frontier fortunes,’ I wrote about certain emerging market economies that are likely to struggle in the current environment. Is there a constructive trajectory for more established emerging economies?

It is interesting to explore the consequence and the cost of policy credibility. Emerging markets have by and large been early to the hiking cycle. For example, in Latin America, most central banks now have double-digit policy rates, while inflation is already in a single-digit zone and on a declining trend. The immediate consequence of policy orthodoxy has been the stabilisation of domestic flows and currencies. We have already seen the market starting to respond to this through a higher focus on the local currency opportunities with EM local currency bond flows exceeding that of hard currency flows year to date. The JP Morgan Emerging Markets Global Bond Index has been a strong performer this year registering +7 total return year to date (8th May 2023).

While appealing to investors has its benefits, there is also a cost to restrictive monetary policy. For example, in Brazil, a policy rate of 13.75% is well above the nominal GDP growth rate of 8.5% as of December 2022. The Brazilian central bank Governor is adamant that the policy rate is appropriate, pointing to uncertainty on the outlook for inflation and fiscal discipline, as well as a relatively healthy state of the economy. However, with Brazil having the highest public debt to GDP ratio among large emerging market economies at 73% investors could start to worry about debt sustainability and growth implications. Indeed, every additional year of current policy rates in Brazil would add 1% to 2% to its debt-to-GDP ratio and have negative growth implications. In this environment, one has to navigate a fragile equilibrium between policy credibility and sustainability. In Colombia, meanwhile, policymakers are mastering a bipolar pattern where on the one hand the government is trying to maintain fiscal discipline and monetary orthodoxy, while on the other hand, the left-leaning president proceeds with a cabinet reshuffle, replacing a market-friendly Minister of Finance, among others, seeking popular support and votes, but creating more market volatility.

While investors can often be attracted to double-digit yields, they should also be careful what they wish for. The double-digit cost of debt is generally not sustainable for countries or companies over the long term. If this trajectory continues, the only winners will be restructuring firms. I believe emerging market policymakers have gained a lot of credibility by being on the front foot of the hiking cycle. The challenge now is transition from a stance of tight monetary policy and a relatively loose fiscal policy to counter the effects of the Covid pandemic and the Russia-Ukraine conflict to more dovish monetary policy and more conservative budgets.

The challenge now is transition from a stance of tight monetary policy and a relatively loose fiscal policy to counter the effects of the Covid pandemic and the Russia-Ukraine conflict to more dovish monetary policy and more conservative budgets.

In this scenario, investors have the potential to register superior returns in EM fixed income assets compared to some of the developed market credits, where tight liquidity is likely to continue to weigh on companies’ margins and debt sustainability may be challenged in some private equity owned businesses. I believe most emerging economies are in a position to deliver this transition, from a tactical allocation (‘high coupon affair’) to a structural allocation in investors’ portfolios (‘true love’). However, as always, execution is key.

The current environment can also create alternative sources of funding for emerging markets through private debt markets and blended finance. Given the need for capital for government-sponsored infrastructure projects, particularly in poorer emerging market countries, we could see market participants developing innovative solutions to bridge the gap that public market closure has created. This dynamic is not too dissimilar to the formation of European private debt markets over a decade ago. Even so, historically investors have been more comfortable with liquid emerging markets exposure given the volatile nature of the asset class.

Extending the liquidity time horizon would require many investors to be convinced of the trustworthiness of their partner in this long-term relationship or to have that exposure de-risked with guarantees or other backing from multilateral development finance institutions or their developed market shareholders. This would also go some way to meeting the pledges made at recent international conferences for the rich north to transfer resources to the poorer south for so-called ‘loss and damage’ from climate change.

For this, emerging market countries have to continue working on improving their institutions, in particular the judicial side including bankruptcy procedures, to become more aligned with some of the European economies, where progress has been made in recent years to improve creditors’ stance in debt restructurings. Over the coming months, ongoing sovereign restructuring discussions with countries such as Zambia and Ghana could provide investors with more clarity on how they can expect a new partnership to develop with these distressed borrowers. Should the stars align with successful outcomes, this could potentially pave the way for a new, more open and constructive relationship framework.

We are currently at the crossroads where emerging markets have an opportunity to be added to the structural allocation of investors’ portfolios, thus migrating from a love affair seduced by a high coupon to advancing into a long-term partnership and true love.

Cape town consider the environment poster

Related content


This document is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM or its affiliated entities listed herein. This document does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. This document is not available for distribution to investors in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited and RBC Indigo Asset Management Inc., which are separate, but affiliated subsidiaries of RBC.

In Canada, this document is provided by RBC Global Asset Management Inc. (including PH&N Institutional) or RBC Indigo Asset Management Inc., each of which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe this document is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

Additional information about RBC GAM may be found at

This document has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate and permissible, be distributed by the above-listed entities in their respective jurisdictions.

Any investment and economic outlook information contained in this document has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions in such information.

Opinions contained herein reflect the judgment and thought leadership of RBC GAM and are subject to change at any time. Such opinions are for informational purposes only and are not intended to be investment or financial advice and should not be relied or acted upon for providing such advice. RBC GAM does not undertake any obligation or responsibility to update such opinions.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc., 2024