Emerging Market Debt: A Once-in-a-Generation Opportunity

GMO

Victoria Courmes

Research

6 Pages

Victoria Courmes argues that EM local currency debt currently offers an unusually attractive entry point due to historically cheap valuations, high real yields, and broad diversification benefits. GMO sees compelling alpha potential in this inefficient asset class, especially as the U.S. dollar remains overvalued.

Key Takeaways

Valuations are historically compelling: EM currencies are deeply undervalued versus the U.S. dollar, echoing the setup of the strong 2003–2011 period for local debt
Rates and growth align: Real and nominal yields in EM local markets are near 20-year highs, while structural policy improvements support longer-term capital flows
Diversification and alpha add appeal: EM local debt provides broader exposure than EM equities, and GMO believes inefficiencies in the space create consistent alpha opportunities
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