Grant Webster

Conflict-related commodity market disruption is just the latest in a series of shocks testing policymakers and unsettling investors. Yet a familiar pattern is playing out in markets.

Grant Webster, Co-Head of EM Sovereign & FX: “Historically, EMs have borne the brunt of supply shocks, but in recent years resilience has become a more common theme. From the post-COVID energy/inflation shock to last year’s trade tariffs and now war in Iran, the initial EM sell-off has been brief and EM outperformance has ensued. At the same time, developed markets have faced rising yields and higher volatility, blurring^[1] the traditional distinction between EM and DM risk. Behind this lies relative strengthening in EM, with prudent fiscal policy, healthier current accounts and proactive central banks all boosting resilience. Investors and rating agencies are increasingly recognising these improvements, with the current EM upgrade cycle among the strongest seen in recent decades. Given this relative policy strength and higher real yields, we believe that EMs are better placed to withstand inflation headwinds.”

Looking ahead, the key question is whether renewed supply shocks could trigger another inflationary episode similar to 2022, when inflation peaked at around 8% in EM^[2] and 7% in DM.

Webster continued: “There will be winners and losers, but the backdrop is very different to 2022 when inflation forecasts had already risen sharply before Russia invaded Ukraine. Since February, EM inflation expectations have only increased by c.50bps and while a further rise is likely, high real rates across EM give central banks a lot more room to manoeuvre than their DM counterparts.”

That resilience is also visible at the corporate level, where many EM companies are used to operating with higher rates and inflation than their developed market peers.

Alan Siow, Co-Head of EM Corporate Debt: “Coupled with the strength of activity data we see across much of the EM universe, that means that EM economies should be better placed to deal with inflationary pressures arising from the supply shock vis-à-vis their DM counterparts.”

Broader lessons from the Middle East

The market reaction to war in Iran is also informative through a more regional lens. While Middle Eastern markets initially came under pressure, the reaction proved short-lived. Credit spreads have already fallen back to pre-war levels, credit ratings have been largely unscathed and bond issuance is continuing and receiving strong investor demand.

Victoria Harling, CIO – Middle East and Co-Head of EM Corporate Debt: “The resilience we’ve seen in Middle Eastern markets reflects a macroeconomic transformation: many economies have worked hard to reduce their reliance on oil exports and that’s really paying off.”

The region is also benefiting from efforts to position itself as a strategic commercial and financial hub in an increasingly multipolar world^[3]. Drawing parallels with the City of London in the early 2000s, Alan Siow “Authorities have made it abundantly clear that the region is open for business, and the number of global companies establishing a presence there is rising. At the same time, the region’s bond markets are becoming bigger, broader and deeper.”

Alongside economic reform, the region is also undergoing rapid social and cultural change. Archie Hart, Emerging Markets Equity Portfolio Manager: “From the vibrant social scene in an increasingly multicultural Saudi Arabia to plans for the region’s first casino in the UAE, the Middle East is changing and fast. Coupled with a raft of favourable characteristics – from time zone to connectivity – this is one of the most exciting regions for investors today.”

Energy market dynamics – a structural growth story for EM investors

While the oil price shock is a global challenge, energy market dynamics are also providing a rich EM-centric opportunity set for investors. Rising energy demand is coinciding with constrained and disrupted supply. Crucially, this is coinciding with a clean tech sector transformation. Solar modules, batteries and electric vehicles (EVs) have become the cheapest options available for EM economic and sustainable development, as China’s ambitious manufacturing and deployment rollout has pushed prices down at extraordinary speed.

Matt Christ, Emerging Market Transition Debt Portfolio Manager: “These improved economics have expanded the commercial opportunity set in EM and many of the associated investment opportunities reside in the private credit world. We’ve made deals across the energy value chain – wind power generation in the Philippines, energy transmission lines in Brazil, a renewable data centre provider in Latin America, and Egypt’s first sustainable aviation fuel production facility.”

Private deals in emerging markets also offer investors a favourable risk/return profile^[4], which contrasts with a loosening of underwriting standards in the US. Alper Kilic, Head of Alternative Credit: “Across EM, we’re seeing investment opportunities that tick multiple boxes for investors: exposure to structural growth themes, attractive yields and strong deal protections – on loans to fundamentally strong borrowers.”

AI – a disruptor and enabler

The examples above help explain how the EM private credit opportunity set is inherently heavy-asset, low-obsolescence (HALO).

Kilic noted: “These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models that are increasingly prevalent in the US private credit market and appear most exposed to risks from AI disruption.”

In EM equities, too, there are compelling comparisons to be made with the US around AI.

The AI boom increasingly depends on hardware. A small group of EM firms sit at the physical limits of that infrastructure; the “Secret Seven”^[5] may represent one of the most overlooked opportunities in global equities today.

“Against a backdrop of a global shortage of chips, AI-driven memory demand is creating an enduring tailwind for South Korea’s Samsung Electronics. SK hynix is another Korean firm benefiting from the memory upcycle underpinning AI infrastructure spend. Elsewhere, a number of companies are well-placed in the context of Taiwan’s AI-export complex and data centre supply chain demand. Some of these businesses trade at multiples that are just a fraction of the lofty valuations seen in the US today,” said Hart.

Meanwhile, CATL is an example of a listed Chinese company with a true global edge: its EV Qilin battery supports a 1,000 km driving range on a single charge. The pace of AI development in the physical economy in China is also accelerating rapidly, including advances in autonomous humanoid robotics, as evidenced by a robot breaking the human half-marathon record.

Hart: “There are increasing parallels with the dotcom bubble, when EM equity valuations remained relatively low while parts of the US stock market overheated. The years that followed saw strong EM outperformance after the bubble burst. Today, we see similar dynamics emerging, making this the most compelling entry point for EM equities I’ve seen in 25 years.”

Reasons to recalibrate investment views

From a more structural perspective, even as resilience strengthens the risk profile of EM assets, an enduring premium remains.  Siow: “While the EM corporate credit universe is highly diverse and it’s vital to take a selective investment approach, the overall compensation for risk is generous. Across the EM universe, country-specific concerns often overshadow a company’s underlying fundamental strength, pushing yields above those offered by DM bonds of a similar credit quality.”

This phenomenon extends to the private market space.

“In the EM private credit world, the reason for the favourable risk/return profile is an enduring barrier to entry. The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding,” said Kilic.

Taking a wider lens, with Hungarian 10-year government bond yields now within around 75bps of their UK equivalents, there is a strengthening case for taking a more holistic view of global investment allocations.

Jaspal Boparai, Co-Head of UK Institutional: “With supply shocks becoming the new norm, traditional asset class behaviour shifting and old EM/DM distinctions breaking down, investors must rethink how they build resilience and diversification in their portfolios while positioning themselves for a transforming world.”

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Notes:
[1] https://ninetyone.com/en/insights/reframing-fixed-income-the-old-rules-are-no-longer-fixed
[2] Ninety One estimates exclude India (incomplete data set), Turkey (extreme values).
[3] https://ninetyone.com/en/insights/the-end-of-easy-globalisation
[4] https://ninetyone.com/en/insights/private-debt-hidden-strengths-in-emerging-markets
[5] https://ninetyone.com/en/insights/the-secret-seven-undervalued-firms-at-the-heart-of-ai-infrastructure

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Alper Kilic

Private credit has grown into a roughly US$3 trillion global asset class since the Global Financial Crisis – but it’s now facing its first serious test. In the US, high-profile bankruptcies, a record credit default rate, and the increased use of payment-in-kind (PIK) structures^[1] are starting to expose the costs of loose underwriting in this increasingly crowded market. Exposure to AI disruption is adding further pressure. In contrast, dynamics are very different in emerging markets, which are relatively uncrowded and are dominated by asset-heavy, cash-flow generative borrowers.

Weakening dynamics in the US contrast with strength in emerging markets

Last year, two widely publicised failures revealed how recent trends in the US private credit market have allowed borrower distress to go undetected until it is too late. Key among these trends is the growth in ‘covenant-lite’ loan structures, which strip out the maintenance covenants – early warning systems for lenders.

While many considered these failures – of sub-prime auto lender Tricolor and auto-parts group First Brands – to be anomalies at the time, headlines and developments since the start of this year suggest they were early signals of a broader deterioration of credit standards. According to Fitch Ratings, the US private credit default rate reached 9.2% for the 12 months to January 2026^[2], its highest level since the index’s inception, while payment-in-kind¹ usage has risen sharply across publicly traded private credit vehicles (BDCs). What we are seeing today are the structural consequences of a market that grew too quickly – where competition has driven down yields and weakened structuring standards in a ‘borrower’s market’.

The US market’s exposure to AI disruption is concentrated in software as a service (SaaS) and business services — sectors where cashflows are less predictable and barriers to entry are falling. For investors, the contrast with emerging markets is increasingly stark.

In emerging markets, lending standards remain high, with lenders able to stipulate robust collateral protections and strong covenants. Deals are often made in collaboration with other banks, and stronger bargaining power allows lenders to take a conservative approach to underwriting deals. Furthermore, the opportunity set is dominated by asset-heavy, cashflow-generative borrowers with limited exposure to sectors most vulnerable to AI disruption.

For example, Ninety One recently provided a senior term loan to fund the expansion of a solar power operator in Brazil. The loan is backed by a portfolio of operating and development-stage solar assets across Latin America, offering robust collateral coverage and a full payment guarantee from the borrower’s US-listed parent company.  By focusing on the gaps in physical digital infrastructure and the associated energy demand, we believe the portfolios are aligned with the tailwind of AI disruption.

Alper Kilic, Head of Alternative Credit: “Unsecured term lending in emerging markets is rare, and borrowers tend to have much lower leverage, – typically 3-4x, compared to 6-7x in developed markets – and lower loan-to-value ratios – typically sub-40%, compared to 50-60% in developed markets – alongside durable market positions. In addition, loans are normally structured under US or UK governing law, with leading international legal firms and Big Four auditors involved. This is a very lender-friendly market.”

Today, it is not unusual to see well-known names – including the world’s biggest sovereign wealth funds – as deal sponsors and co-lenders, a clear vote of confidence in emerging market private credit. However, success depends heavily on structuring expertise and local market knowledge.

Nathaniel Micklem, Co-Head of Emerging Market Alternative Debt: “Building on almost two decades of experience, we make sure our investments feature multiple layers of protection. We look for borrowers with low corporate leverage, favour blue-chip market leaders, and structure deals to include robust covenants. Limited competition gives us good bargaining power, while a focus on strong sponsors and markets where infrastructure assets enjoy sovereign support provides an additional level of comfort.”

Senior-secured yields, without the structural compromises

What makes the emerging markets private credit opportunity particularly striking is where the return premium sits in the capital structure. In US direct lending, achieving attractive yields often requires accepting structural subordination or levering a fund vehicle. In emerging markets, the premium is available at the senior and senior-secured level – a reflection of origination complexity and lender bargaining power; investors are compensated for expertise and access, not for taking on additional credit risk.

“The yield pick-up in emerging markets is significant, despite strong borrower fundamentals. For example, one of our US dollar-based loans – to fund an ambitious EV expansion programme in a Turkish city – provides 200bps more yield than the public bond issuance from the same municipal issuer,” said Matt Christ, Portfolio Manager, Emerging Market Transition Debt.

Structural growth is creating compelling investment opportunities across key themes

Private credit in emerging markets is supported by powerful structural tailwinds. Growing populations and rising demand for utilities, goods and services are fuelling financing requirements, with private credit increasingly financing renewable energy generation, digital connectivity infrastructure and electric mobility platforms across the developing world. In addition, the rapid growth of AI is creating new investment opportunities; last year, Ninety One lent to two data centre operators in Latin America that have committed to maintain or increase the share of their energy sourced from renewables to 100%.

Crucially, these sectors benefit from powerful structural demand growth while offering lenders stable cashflows and tangible collateral.

Kilic: “The emerging market private credit opportunity set is inherently asset-heavy – think power generation, transmission infrastructure, water and industrial transition projects. These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models prevalent in the US private credit market, which are more exposed to AI disruption.”

Example deals across Ninety One’s platform include:

• Senior secured debt finance for a Vietnamese renewable company with >100MW of operational assets seeking to raise platform financing to support platform expansion.
• A senior investment loan to fund infrastructure development and facilitate the building of apartments targeting low- to middle-income homeowners in South Africa.
• A senior secured term loan to a leading third-party cold storage logistics supplier for the food and agriculture business in Latin America.

Martijn Proos, Co-Head of Emerging Market Alternative Debt: “Expanding infrastructure requirements are creating an abundant deal pipeline. And by directing capital towards essential transport, energy, water, urban infrastructure and digital communication infrastructure, investors also contribute to social& economic development and environmental sustainability.”

Experience is an enduring barrier to entry

The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding.

Investors need local-market experience to recognise where risk is mispriced and extensive expertise in deal structuring. Today, only a limited number of investors are seasoned in this space. A broad and deep origination network – something that cannot be bought or created overnight – also helps to ensure diversification and allows lenders to select the best opportunities.

Kilic concluded: “Developed markets private credit has become a crowded trade. In emerging markets, it remains a lender’s market – and that makes all the difference.”

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