A strong dollar compresses EM currency spreads but creates entry points for sophisticated investors. We examine the conditions under which EM debt becomes compelling.
The dollar's strength against emerging-market currencies creates a paradox: it makes EM debt cheaper in dollar terms, but more expensive in local currency terms. For dollar-based investors, the entry point is attractive. For local-currency investors, the cost of hedging becomes prohibitive.
At IIG, we believe the opportunity lies in selective, well-structured EM mandates. Not all emerging-market debt is created equal. Countries with strong external balances, credible monetary policy, and diversified export bases offer fundamentally different risk profiles to those dependent on commodity exports or short-term capital flows.
India's position
India occupies a unique position in the EM debt landscape. Its external balance is strong, its foreign exchange reserves are at record levels, and its monetary policy framework has become more credible. The result is that Indian assets — both debt and equity — trade at tighter spreads than most EM peers, but the structural quality justifies the premium.
The strongest dollar in decades has created a once-in-a-cycle entry point for EM debt. The question is whether investors have the patience to ride out the volatility.