For one of the world’s largest bond managers, the rally that swept through emerging markets last year was a prelude to a longer-lasting trend.
“This is a playbook that will last for many years,” Pramol Dhawan, head of emerging markets portfolio management at Pacific Investment Management Co., said in an interview in New York. “We’re not interested in taking chips off the table. Not at all.”
A fund Dhawan manages — which tilts heavily toward local-currency government bonds from developing nations — used that playbook to post a 22% return over the past year, better than nearly 90% of peers. That helped lift assets under management to about $6.4 billion, the highest since 2013, data compiled by Bloomberg show.
Emerging assets had a stellar 2025, particularly in local markets. An equity gauge rose more than 30%, nearly double the gains of the S&P 500. A Bloomberg index of local currency-denominated bonds posted a 17% return, fueled in part by a softening US dollar and the resumption of inflows.
Of course, emerging markets have a history of burning investors who were lured by false dawns. Even amid last year’s rally, big bets soured in a flash in places like Argentina and Turkey due to political surprises.
But Dhawan said his case is built around a shift in fundamentals that’s challenging long-held assumptions for global investors: Fiscal concerns are on the rise in advanced economies while developing-nation governments are showing more discipline. And factors that were long the realm of emerging markets, such as questions over central bank independence, are turning up in places like the US.
Some of those concerns fueled the dollar’s worst year since 2017 and, in turn, helped prop up returns for emerging-market investors.
Dhawan said he isn’t “making a blanket bet against the dollar,” but instead favoring credits that have demonstrated strong fiscal discipline and a prudent approach to taming inflation.
“Some of the best balance sheets are in select high-quality emerging markets,” said Dhawan. “I can see a world where some EM yields trade inside DM.”
Pimco favors local-currency bonds over hard-currency debt from emerging markets in a “roughly 2:1” ratio across its portfolios, according to Dhawan.
Some of his favorite bets include Peru, South Africa, Brazil and Turkey, along with select frontier markets such as Egypt and Nigeria.
“Many EM central banks have built credibility, real yields are attractive, and we see scope for currency appreciation,” Dhawan said. “This is a different emerging-market rally from the one in the early 2000s — it’s a durable investment theme.”
Written by: Vinicius Andrade and Giovanna Bellotti Azevedo @Bloomberg
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