In a landscape marked by volatile currencies and mounting US fiscal concerns, emerging-market ( EM ) debt is rapidly gaining traction as a favoured asset class among Asian investors.

“This is the first time in my professional career that I remember when every part of the globe is interested in EM debt,” says Boston-based Katrina Uzun, institutional portfolio manager at MFS Investment Management, in an online interview with The Asset as part of her Asian tour.

“We've had three consistent years of outflows – 2022, 2023 and 2024 – and then last year ( 2025 ) was the first year of inflows into the asset class back into hard-currency and local-currency debt, and those inflows continue year to date in the beginning of this year.”

According to Uzun, this surge represents a pivotal shift, with clients across the region reallocating funds away from traditional safe havens like US treasuries and towards EM debt. But while noting that this is part of a broader global trend, she stresses that Asia's focus on both hard- and local-currency debt signals a strategic pivot towards diversification and yield.

“In Asia, there is definitely a lot of interest in both hard currency and local currency. Last year, we won a big Asia mandate for the local-currency debt strategy. Europe is still pretty big on hard currency and also blended. So that's where we combine hard currency, local currency, sovereign, and corporate, and kind of create this ‘best ideas’ approach. And then Latin America is – actually, I just came back from Latin America, and there's lots of interest in local-currency debt,” Uzun says.

Diversification trend

MFS, which oversees over US$15 billion in dedicated EM debt assets, has observed unprecedented inflows following three consecutive years of outflows from 2022 to 2024. Based on J.P. Morgan data, she says, EM investors are holding the highest cash levels in a decade, signalling substantial sidelined capital poised to enter the market.

For Asian investors, this translates to active engagement as MFS secured a significant mandate in the region last year for its local currency strategy, and Uzun’s packed schedule of meetings post-Lunar New Year reflects robust demand.

The primary driver is diversification from overexposure to US assets. Uzun explains that the US dollar's 10% depreciation last year defied expectations of it as a safe-haven currency, particularly amid volatility spikes such as the one triggered by US President Donald Trump’s “Liberation Day” tariffs.

“Investors who left US equity positions unhedged faced disappointments, prompting a rethink,” she says. “The US grapples with a widening current account deficit and fiscal imbalances nearing World War II-era levels, fuelled by entitlement spending and an ageing population. If this were an emerging economy, we'd steer clear.”

In contrast, EM economies have stronger fundamentals, particularly average basic balances in fiscal surplus, which means many of them are relying less on external borrowing and improving fiscal deficits post-pandemic.

Dollar weakness

For Asian investors, EM debt offers compelling yields and resilience. Hard-currency strategies, benchmarked against the US dollar, appeal to the call for stability, while local-currency options provide higher carry potential in a depreciating dollar environment.

Uzun anticipates dollar weakness persisting in a seven- to 10-year cycle, benefiting both segments with local currency typically outperforming.

MFS’s “best ideas” investment strategy focuses on allocating across sovereign, corporate, and local debt, while overweighting local currency. It favours currencies such as those of Brazil, Chile, Peru, Uruguay, the Czech Republic, South Africa, and Thailand for their high real rates and reform momentum.

Regionally, opportunities abound in BB-rated countries like Paraguay, Guatemala, Uzbekistan, and even high-yielders such as Argentina, where post-election reforms have bolstered reserves and US support.

In Asia, however, MFS maintains underweights in Indonesia, the Philippines, and China due to tight valuations and governance issues. Uzun mentions the institutional erosion in Indonesia under President Prabowo Subianto.

China presents a mixed picture with an undervalued renminbi warranting slight overweight, but bifurcated growth ( strong in AI and manufacturing, weak in household sentiment and property ) limits upside, positioning it as a stabilizer rather than a growth driver.

Bright outlook, risks

Looking 12-24 months ahead, Uzun is optimistic, citing five tailwinds: resilient global growth, dollar depreciation, EM momentum, attractive 6.8% yields ( historically yielding 10% annualized returns over five years ), and supportive technicals.

However, risks loom, including AI's disruptive impact on services exports ( affecting India and the Philippines ), geopolitical tensions in China-Taiwan and the Middle East ( with a 60-65% chance of an intervention in Iran spiking oil ), and US policy shifts. She sees two Federal Reserve rate cuts in the second half of 2026, in June and September, as inflation hovers around 2.7-2.8%.

For Asian institutions such as pension funds and insurers, EM debt's blend of yield, diversification, and fundamental strength makes it a “go-to” amid the uncertainties.

“This is the first time the entire globe is interested in EM,” Uzun says, and this signals a potential multi-year boom.

With MFS's flagship hard-currency fund at US$13.8 billion and local strategies drawing Asian inflows, the asset class is poised to redefine portfolios in the region.