Despite a challenging macro environment with wars and high interest rates, and with valuations considered stretched, investors are not pulling out of emerging markets. The primary reason is that corporate and economic fundamentals in these regions remain surprisingly healthy, forcing investors to stay invested despite low conviction.
Frontier markets are transitioning from a niche play to a more mainstream asset class, evidenced by the launch of JP Morgan's GBI EM Edge Index. This new index, covering 26 frontier countries, provides a formal structure that helps institutional investors track, analyze, and systematically invest in these smaller economies.
While investors perceive Asia's high-yield market as shrinking and tight on spreads, a massive wave of supply is on the horizon. An estimated $100 billion in data center-related debt is expected over the next four years, likely offering attractive spreads that will create significant new opportunities for credit investors.
The most attractive investment opportunities in frontier markets are not in hard currency debt, which is often scarce or trades at very tight spreads. Instead, investors should focus on local currency markets and foreign exchange (FX), where the potential for alpha and higher returns is significantly greater.