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Expand horizons for yield

The case for reallocating to emerging market debt (EMD)

August 1, 2025 | 3 min read

So far in 2025, the U.S. has triggered the worst global tariff hit in a century, followed by a spectacular climb down on U.S.-China tariffs in early May, and an ensuing market questioning of U.S. long term fiscal sustainability as U.S. debt lost its last AAA rating in May. This has made some themes in EMD assets much clearer.

Global reduction in exposure to U.S. assets will benefit EMD

  • Tariffs and erratic policy announcements translated first into a general weakness for the USD versus the Group of Ten (G10) foreign exchange (FX), but also increasingly versus EM currencies, as global investors have started hedging some of their $20 trillion global exposure to U.S. assets.
  • Investors have started to raise some issues with U.S. markets
    • Tariffs and immigration clampdown should result in weaker growth and stickier inflation, leading to higher Treasury yields and a steeper yield curve
    • Growing concerns about policy uncertainty, credibility issues, rule of law
    • Questions about U.S. growth prospects and deficit financing
    • All of the above in a context of relatively high equity and credit valuations
  • Past investors’ behavior cycles show that FX hedging is often a first step. Larger institutional investors (insurance companies, pension funds) may start to shift their strategic asset allocation in the coming months. Although U.S. assets will retain a large allocation in global portfolios given their sheer depth and liquidity, Global (and U.S.) investors are more open to looking for other opportunities.

Explore Principal Finisterre Emerging Markets Total Return Bond Fund

EMD continues to show resilience amidst global turmoil

In such a context, EM debt assets offer three clear advantages: under-ownership, offering true “value for money”, and maximum diversification.

  • Under-owned: EMD ownership is now at a 20-year low. Global allocations have remained at rock bottom levels as investors ignored EMD assets post COVID, obsessed by developed market credits & private debt.
  • Diversifying: For all the drama over tariffs and geopolitics, we find that most EMD assets which matter in terms of performance are farthest from U.S. concerns, are less affected by tariffs risks, and greatly benefit from a weaker USD environment.
  • “Value for Money” can be found in various segments of the EMD market, including:
    • EM corporate USD credits that offer higher yields than U.S. equivalents with often better fundamentals.
    • EM ex-Asia local government bonds that have yields near 20-year highs, with controlled inflation and conservative monetary policies, allowing central banks flexibility to support growth.
    • EM currencies across regions benefitting from USD weakness, supported by attractive valuations and high yields (ex-Asia).
    • EM sovereign USD credits which offer attractive yields and returns potential, bolstered by IMF support for weaker credits and meaningful reforms in stronger markets.

Explore Principal Finisterre Emerging Markets Total Return Bond Fund

Maximizing the entire EMD opportunity set

We believe the typical approach of investing in EMD through benchmarked funds generates undue volatility and historically failed to harness the true sources of value in the asset class.

Our 12-year-old EMD total return strategy takes a flexible approach, investing across the whole EMD universe, and seeking to provide an asymmetric total return stream over the market cycle.

The Principal Finisterre value proposition aims at maximizing portfolio income at all times, capturing the market upside during rallies, while also focusing on limiting downside risk during crises and drawdowns.

Principal Finisterre advantage:

  • Access to a compelling and well tested one-stop EMD solution for global institutions, discretionary portfolio managers, and asset allocators.
  • Harnessing the potential of all three EMD asset classes: USD sovereigns and corporate credits, as well as local currency debt and FX.
  • Exposure to non-U.S. duration with high yield levels, enhanced EM FX exposure in a weaker USD environment, and a range of uncorrelated, asymmetric opportunities in frontier credits.
  • Active management to help navigate market cycles and allocate across the full spectrum of EMD opportunities.

Explore Principal Finisterre Emerging Markets Total Return Bond Fund

Portfolio management

Principal Finisterre

As a specialist emerging market debt manager committed to delivering innovative solutions that can perform in most market conditions, we explore the full potential of the EMD asset class to deliver a range of return streams relying on different blends of:

  • income generation
  • market timing strategies, to capture EMD rallies
  • “alpha” generation from idiosyncratic or relative value ideas
  • hedging strategies to limit downside

We utilize an unconstrained, but disciplined and time-tested approach to maximize income, and manage portfolio volatility and liquidity.

Chief Investment Officer
Damien Buchet, CFA
33 years of experience
Senior Portfolio Manager
Christopher Watson, CFA
26 years of experience
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Disclosure

Carefully consider a fund’s objectives, risks, charges, and expenses. Contact your financial professional or visit www.PrincipalAM.com for a prospectus, or summary prospectus if available, containing this and other information. Please read it carefully before investing.

All figures shown in this document are in U.S. dollars unless otherwise noted.

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. 

Asset allocation and diversification do not ensure a profit or protect against a loss.

International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards. Emerging market debt may be subject to heightened default and liquidity risk. Risk is magnified in emerging markets, which may lack established legal, political, business, or social structures to support securities markets. Fixed Income investments are subject to interest rate risk; when interest rates rise, the price of debt typically declines. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards.

Principal Funds are distributed by Principal Funds Distributor, Inc.

© 2025 Principal Financial Services, Inc., Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset Management℠ is a trade name of Principal Global Investors, LLC.

Principal Finisterre is an investment team within Principal Global Investors.

MM10787WA | 08/2025 | 4731903-082026