Is it time for emerging market credit? With equity valuations stretched and investors hunting for alternatives, emerging market private credit fundraising more than doubled in the first half of 2026. This isn't a passing spike but a structural shift changing the arithmetic of credit allocations.
By Chris Wehbé (CEO) and Andrea Rocchi (Capital Solutions)
Fundraising for emerging market private credit more than doubled year on year in the first half of 2026. In this market, a move of that size has been historically rare. Since it became investable at scale, the asset class has often been treated as a specialist option, if not ignored altogether. A recent industry global survey confirms this: emerging markets account for under 6% of the average private credit portfolio, with 40% of respondents holding none at all, putting the allocation well below what its broader economic weight would imply.
That this underweight has not been challenged over the past two decades is not surprising. After the financial crisis, US equities have compounded close to 15% a year while policy rates have been near zero, creating few incentives to look further afield or, indeed, toward higher fixed-income allocations more generally.
Moreover, perceptions are hard to shift. EM credit as a whole is considered riskier than its developed-market equivalent, an idea shared by 70% of survey respondents to the survey. Although this can be true, the judgement suggests a tendency to paint a highly varied market with a single brush.
Still, 42% of those same investors say they intend to increase their emerging market credit position within the next two years. Rather than reflecting a short-term rotation, we think the shift is the consequence of structural trends that are changing the arithmetic of credit allocation. Three in particular have converged: US equity, the dominant higher-returning asset allocation, is increasingly expensive, the global yield environment has normalised at structurally higher levels, and mainstream assets are increasingly concentrated and correlated. Together, these factors may make the case for the asset class stronger than it has ever been. We will consider each in turn.
Too rich to rely on: the problem with US equity-heavy portfolios
By any historical measure, US equities are expensive. However, this is not by accident. Key profitability measures such as return on invested capital and corporate profits as a share of GDP are at record highs, driven in recent quarters by AI-driven efficiency gains. This is the culmination of a two-decade trend whereby a combination of scale, market share, cheap capital and favourable policy has let a small group of hyperscalers generate profit and open new markets at a pace unprecedented in recent times. Equity performance over that period rests directly on this earnings expansion: information technology and communication services accounted for more than 60% of the S&P 500’s total return in 2025.
Although part of the setup behind their success remains in place, current prices rest on the promise that AI will let hyperscalers grow even faster than they have in recent history. We don’t want to dismiss the potential of the AI revolution, but the question is how much of it is already priced in. Many estimates put revenue on a slower trajectory than the investment already committed would require. The implied US equity risk premium is now negative on forward and trailing earnings, a combination last seen in the dot-com era. This does not mean that valuations are wrong, but it does explain why a growing number of allocators are starting to consider other options more carefully.
High-yielding credit is one obvious alternative, as it can provide both competitive returns and diversification. Selective exposure to emerging market credit, particularly on the private side, offers spreads that can be significantly higher than their US counterparts, and a structurally low correlation to equity, which has held through the most recent technology sell-offs.
Bonds are rewarding investors again
In September, government bond yields across developed markets reached levels not seen in decades. The 10-year US Treasury touched its highest since 2007. The rise in yields has revived concern about the sustainability of public finances. The fiscal concern is well founded, but it tells only part of the story.
What we think we are seeing is the unwinding of the 2010s and a normalisation of the bond market. Quantitative easing combined with structurally low inflation depressed yields for much of the post-2008 period. That phase was a historic anomaly, far more than the current one. Today’s yields, though high relative to the last cycle, still sit below the roughly 5.3% median for the 10-year since the 1960s.
As a result, we think that yield equilibrium will remain higher at least over the medium term, since the factors that drove the normalisation are still in place. Inflation has returned, the zero-rate era is over, central banks have stopped buying bonds, and deficits persist across developed markets alongside new borrowing requirements for defence and AI infrastructure.
For investors, this brings some good news. Real bond returns have stabilised and in many cases turned positive despite recent yield volatility. After more than a decade in which returns depended on capital gains, bonds again offer an income stream that compounds over time.
Yield volatility, however, remains a concern, pushed by sticky inflation, sustained AI-related borrowing and elevated government spending. Among developed economies, the US position is perhaps the most notable, with a federal deficit near 6.8% of GDP.
In this setting, quality emerging market credit becomes relatively more competitive. Several larger emerging economies now carry debt burdens that are comparable to or lower than those in the developed world, and sustain faster growth while doing so. With the risk-free rate structurally higher and more volatile, a selective allocation can deliver both higher returns and a buffer against that volatility.
US concentration is creating a correlation risk
Both equity and credit markets are increasingly concentrated in a handful of US companies. On the equity side, the United States now accounts for 72.1% of the MSCI World Index, with its ten largest constituents at 26.6% and the Magnificent Seven alone at roughly 24%.
The US also accounts for 38.1% of global fixed income securities outstanding, a share being pushed even higher by AI-related investments. US investment-grade spreads have meanwhile compressed to multi-decade lows, driven more by shrinking liquidity premia than by improving credit quality, leaving investors paid less for the same risk.
This double layer of concentration is creating a correlation risk. AI-related debt accounted for 27% of all net investment-grade bond issuance in 2026 year-to-date, and hyperscaler issuance has risen from 2% of US investment-grade supply between 2022 and 2024 to an expected 9% this year, leaving US investment-grade credit and mega-cap technology equity exposed to the same underlying risk.
We think both markets will continue to attract capital more than any other global alternative. But as the AI investment cycle distorts traditional diversification patterns, investors have greater incentive to look elsewhere.
The case for considering alternatives
Taken together, all these factors create an environment that will remain favourable for EM credit in the medium term.
On return, the asset class is pricing more competitively against both equity expectations and the rest of a bond allocation. Many EM economies are now acting with fiscal and monetary discipline comparable to some developed economies.
And the default record is historically comparable to, if not better than, that of riskier developed credit. GEMs Consortium data covering 1994 to 2024 put private emerging market borrowers defaulting at 3.54% a year, against an average of 4.5% for US high yield since 1996.
The 2000s are the closest analogue to what we see now in the markets, a period of expensive equity alongside structurally high yields. The S&P 500 compounded at minus 0.9% a year over that decade, while credit delivered positive returns throughout.
That doesn’t mean history will necessarily repeat itself. Many things have changed, and spreads were considerably wider then than now. Moreover, discount rates are higher, a strengthening dollar pressures borrowers, and geopolitical risk has not diminished. But EM is an opportunity today that deserves consideration for those thinking about credit allocation, and we think it has strong potential to reward those who can select the right opportunities.