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May 05, 2026
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5 min read
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Limited exposure: People cross the street in front of a Chase Bank branch in Chicago, Illinois. JPMorgan Chase is telling clients to seek protection against potential losses in risk assets through a credit-default swap index. — AFP
JPMorgan Chase & Co is telling clients to seek protection against potential losses in risk assets through a credit-default swap index, while Fidelity International and London-based hedge fund Frontier Road Limited are cutting or limiting their exposure to developing debt.
At PPM America, managers are taking a more selective approach, targeting countries that may perform well regardless of how the war in Iran evolves.
The adjustments reflect a growing sense of unease among investors, many of whom question whether the rally in developing world debt, clocking its 12th monthly gain in 13, has gone too far.
Spreads on emerging market bonds have narrowed to near their lowest levels since 2013, extending gains even as the Iran conflict drags on and inflicts economic damage globally.
“Prices are implying everything will be fine, and that could be true. But if it’s not, then the market’s probably wrong in a pretty material way,” said Matthew Graves, a portfolio manager at PPM.
“There’s really no margin for error in prices.”
Policymakers have grown more vocal about the risks tied to the conflict. Last week, the Federal Reserve’s split decision to hold interest rates showed a deepening division over the outlook amid the ongoing tensions.
Officials in Chile and Thailand, who kept rates unchanged, also warned of impacts from the war, while Pakistan delivered a larger-than-expected hike amid disruptions to energy supplies.
The divergence is evident across asset classes. Equities in both emerging and developed markets have climbed to fresh highs even as the conflict persists, reinforcing that investors may be underpricing the risks.
“Credit spreads are holding firm, but don’t mistake resilience for safety,” said Ben Ramsey, head of emerging markets sovereign strategy at JPMorgan, in a note dated April 28.
“We think it is prudent to hedge the possibility of a jump higher in spreads.”
During the initial weeks of the ceasefire, fund managers like Aberdeen built up cash levels to create a buffer in anticipation of a breakdown in talks, according to emerging markets analyst Leo Morawiecki.
But now, even as efforts to resume peace negotiations stalled, his team has slowly started deploying cash again.
Persistent high oil prices could provide opportunity for some developing nations exposed to energy.
The likes of Martin Bercetche, a portfolio manager at Frontier Road, are sticking with credits, including Venezuela and Ukraine corporates, because they seem relatively uncorrelated to the broader market.
Whether inflows into emerging-market debt funds pick up in the coming weeks may be key to determining if the rally can be sustained. Investors will also monitor the risk of a global or US recession if the conflict drags on.
Iran delivered a new peace proposal to the United States last Friday, but President Donald Trump vowed to maintain a naval blockade.
“The asset class is experiencing inflows so it can continue to be well supported but from a medium to long term perspective we see little value being outright long,” said Bercetche, whose fund returned 32% last year.
Part of the market’s resilience reflects stronger fundamentals across many developing economies, which have spent years rebuilding buffers.
Higher foreign-exchange reserves and more diversified funding sources are helping anchor sentiment even as spreads are tight, according to Carmen Altenkirch, an analyst at Aviva Investors.
Despite rich valuations, emerging market watchers said improving fundamentals should prevent investors from panicking or turning too negative on the asset class.
The way David Austerweil sees it, the resilience party reflects investor fatigue after months of whipsawing headlines, with bearish bets repeatedly squeezed by swift recoveries.
Gulf credits are “too tight” amid supply pressure from rising fiscal costs and oil importers will also face pressure, added Austerweil, emerging markets deputy portfolio manager at Van Eck Associates Corp.
“There is a mixture of complacency, exhaustion and fear of missing out,” he said. — Bloomberg
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