Published: April 9, 2026
The three themes we suggested would characterize 2026 – volatility, fragmentation, and dispersion – went into overdrive following the Middle East War that began with the February 28 Israel-U.S. attacks on Iran. As the conflict spread to more countries, these themes manifested as unusual economic and financial fluctuations, disruptions to an expanding set of supply chains, and a marked differentiation in how individual countries are impacted and their capacity to respond at a policy level. Consequently, the fallout for the global economy and markets expanded, increasingly in a non-linear fashion and not immediately and easily reversed by an end to hostilities.
As the war’s economic spillovers evolved from short-term disruptions into longer-term structural damage to energy infrastructure, the global economy is contending with more than just high oil/gas prices and increased borrowing costs. With that comes a higher risk to growth, employment, and financial instability. In this environment, the hope for a quick “mean reversion” could give way to “multiple equilibrium” dynamics, where one negative outcome could increase the probability of another.
Needless to say, the impact would not be uniform across all nations. This divergence begins with energy: self-sufficient nations, like the United States, are grappling with higher prices, while energy-importing nations in Asia and elsewhere must also worry about securing sufficient quantities depending on what happens in the Middle East. Already, some nations had to introduce restrictions on economic activity to lower energy consumption.
Should the war resume, and it is an if, the global economy would have a bigger risk of reaching more tipping points that extend well beyond energy. We have already seen a wider range of interrupted supply chains alongside a probable short-term shift in international capital flows. This was not merely a shock that pushed government bond yields higher, widened credit spreads, and threatens a broader inflation shock; it was also a risk to financial stability, given pre-existing concerns regarding AI-related financial excesses, certain segments of private credit, and over-leverage in specific sovereign bond markets.
In a world subject to more frequent and violent shocks, a premium is placed on resilience and self-insurance. Unfortunately, too many countries have experienced an erosion in their financial and human resilience, as well as a contraction in their policy “headroom.” This will contribute to greater differentiation in individual national outlooks and policy responses.
The implications for investment strategies involve both defense and offense. As detailed in the sections that follow, our approach centers on protecting against the downside while maintaining the agility to capitalize on the opportunities that inevitably arise in such volatile circumstances.
Global Growth: Dispersion & Fragmentation
The global economy entered the latest shock from a position of relative stability, with real GDP growth tracking just above 3%. However, the outlook has become increasingly clouded by downside risks, the severity of which will depend on both the duration and breadth of energy and supply disruptions stemming from the Iran conflict, regardless of the ceasefire deal announced on April 8. To date, downward revisions to growth forecasts have been modest – generally in the range of 10-20 basis points – reflecting a prevailing assumption that the geopolitical conflict represents primarily a volatility and price shock and that supply bottlenecks will remain brief. For now, the OECD’s March Interim Report left the 2026 global growth forecast unchanged from its December outlook at 2.9% but revised down 2027 by 10bps to 3.0%. Structural improvements in energy efficiency and system resilience developed in response to prior shocks support the case for contained impact in select economies.
The impact on global growth dynamics in the current quarter hinges on the extent of and speed with which the global economy can emerge from the damage already caused by the six weeks of war in the Middle East and the durability of the announced ceasefire. In case the ceasefire deal collapses after the initial two-week period and a more adverse scenario materializes, in which elevated energy prices persist, supply chain disruptions intensify, and second- and third-order effects propagate through the global economy, growth expectations are likely to be revised more materially over time, potentially converging toward 2.5%. However, the probability of the adverse scenario appears to have declined at the time of writing as of early April.
Regionally, the impact of economic disruptions from the conflict is expected to be uneven. The energy-secure United States is comparatively insulated, though not immune. Risks remain tied to demand erosion from sustained price pressures and the potential for financial instability, particularly in the context of rising private credit vulnerabilities. Net commodity exporters in emerging markets with terms-of-trade improvements and normalized energy subsidies should be relative winners. In contrast, Asia and several European economies appear most exposed, given their reliance on vulnerable energy supply chains. While China and India are heavily dependent on Middle Eastern energy imports, existing crude reserves provide a degree of near-term cushioning against supply disruptions.
In China, policymakers have already signaled a more cautious outlook, lowering the 2026 growth target to a range of 4.5-5.0% from approximately 5.0% previously. Nonetheless, external demand continued to underpin activity in the early part of the year. Trade diversification away from the United States to the rest of the world has helped sustain a robust trade surplus and reduce the need for imminent policy stimulus. March PMI readings suggest resilience but reflect higher input and output prices as well as lengthening delivery times.
Beyond energy markets, emerging pressures in critical inputs such as fertilizer, pose additional risks, particularly for global food systems. Disruptions to these time-sensitive inputs could exacerbate food inflation and contribute to shortages as key planting seasons approach. Brazil, India, Australia, and South Africa source a high share of fertilizer imports from the Middle East.
Industrial sectors may also face strain, especially if supply interruptions in aluminum and petrochemicals become more pronounced. For now, evidence of disruption remains preliminary, with early indicators – such as lengthening manufacturing delivery times and softness in March PMI data – most visible in Europe.
On the trade front, U.S. bilateral tariff rates declined following the Supreme Court’s ruling against tariffs imposed under the International Emergency Economic Powers Act. In response, the Trump administration introduced a new 10% global tariff, subsequently increasing it to the statutory maximum of 15% for a 150-day period. Notably, countries including Brazil, China, India, and Indonesia experienced significant tariff reductions. Looking ahead, we anticipate steady progress in Section 301 trade investigations throughout the second quarter, culminating in the announcement of new country and sector-specific tariffs around the turn of the quarter.
Central Bank Policy: From Accommodation to Tightening Watch
As we entered 2026, we and most other market participants anticipated a continuation of accommodative monetary policy by the global systemic central banks amid gradual disinflation dynamics and modest growth dynamics. That was a conducive backdrop for continuation of policy easing by select emerging market central banks that have the comfort of relatively high real interest rate buffers and could afford to lower rates with limited risks from eroding interest rate differentials. In addition, a structurally weaker U.S. dollar was another important tailwind for emerging market economies and policymakers.
This benign environment was significantly challenged by the military conflict in the Middle East at the end of the first quarter. In that context, the OECD revised its 2026 inflation forecast for the G20 economies materially higher by 1.2 percentage points to 4.0% YoY, from 2.8% projected in December 2025. Second degree effects could also impact fertilizer markets, testing global agricultural production and putting additional upside pressure on food prices in the second half of the year. Despite the ceasefire deal announced on April 8, accumulated supply shortages are likely to continue to pressure global inflation dynamics in the coming months. Easing of these shortages and associated inflationary pressures would depend on how fast and effective the reopening of vital shipping lanes through the Strait of Hormuz would be and the extent of damage to critical energy infrastructure across the Persian Gulf.
Faced with significantly different balance of risks compared to last quarter and elevated uncertainty around the duration and severity of geopolitically driven economic disruptions, systemic central banks and markets could still face in 2Q a macroeconomic outlook increasingly characterized by lower growth and higher inflation prospects. Against a more uncertain backdrop compared to last quarter, central banks in both emerging and developed economies have almost uniformly paused rate cuts at the end of 1Q and have signaled increased data dependency and a preference for a “wait-and-see” approach going forward.
When it comes to single-mandate (inflation target only) central banks, a scenario involving rate hikes to protect against a near-term surge in inflation pressures has come back to the table; however, investors repriced the potential scale of monetary policy tightening lower following the April 8 ceasefire deal. At the time of writing, markets were still pricing around 50bps of hikes by the European Central Bank (ECB) and around 30bps by the Bank of England (BoE) by the end of 2026.
For the dual-mandate Fed (inflation and employment), the market’s base case has shifted to no change in the policy rate this year, which was not altered significantly by the two-week ceasefire announcement. However, more significant slowdowns in total demand and consumption dynamics in the developed economies during the second quarter triggered by the energy price shock could drive more meaningful concerns about proper recession risks beyond stagflation, putting central bank policymakers in a particularly complex macroeconomic dilemma to navigate.
The same applies to emerging market economies as their own economic policy space is likely to be challenged by tighter global financing conditions and slower than expected growth dynamics relative to the start of the year. In that context, we expect that initial conditions, i.e. idiosyncratic credit metrics, will increasingly come into focus with stronger fundamentals and policy flexibility as key differentiating factors between winners and losers among global sovereign assets.
In the Geopolitical Sandstorm
The start of the second quarter delivered a two-week ceasefire agreement between the Trump administration and Iran, which drove a significant relief rally across global markets. However, the trajectory and endgame beyond the two-week period remains uncertain, given that the two sides appear to be far apart on their respective visions/conditions for sustainable peace in the region as well as Israel’s continuing military operations against Iran’s allies in Lebanon. Regardless, the ceasefire takes away the worst-case near-term scenario for markets (i.e. dramatic military escalation threatened by President Trump during the negotiation process), which we expect to translate in a cautious risk-on sentiment.
We expect U.S.-China relations to remain relatively stable despite the postponement of President Trump’s state visit to Beijing, now scheduled for May 14-15, 2026, following earlier delays related to the Iran conflict. President Xi has not publicly criticized President Trump or the United States in the context of the Middle East situation while diplomatic engagement continues in advance of the summit. While another adjustment to the visit cannot be ruled out, we anticipate moderate deliverables from the meeting, with an emphasis on maintaining dialogue and managing tensions rather than breakthrough agreements.
In Venezuela, the normalization process continues to advance with the country emerging as a key beneficiary of elevated oil prices amid Middle East geopolitical tensions. The U.S. has recognized Interim President Delcy Rodriguez, issued expanded licenses for transactions in oil and gas, mining and other sectors, and the IMF has indicated progress towards technical level interaction with Venezuela. Domestically, the passage of revised hydrocarbons and amnesty laws and sidelining of regime hardliners are key steps to improvement in investment and political conditions. Looking ahead, key signposts include further normalization of the economy and diplomatic relations, implementation of the hydrocarbons and amnesty laws, and possible clarity on a path to new elections.
In Mexico, the USMCA renewal process is increasingly coming into focus as technical teams meet regularly ahead of the formal review submissions due July 1, 2026. A central U.S. priority remains deeper integration of Western Hemisphere supply chains and a reduction in China’s role in regional trade and investment. Mexico has already implemented tariffs as of January 1 on imports from countries with which it lacks trade agreements, including China, reflecting these strategic objectives. We continue to expect President Claudia Sheinbaum to pursue strong economic integration with the United States, while carefully managing domestic political narratives. There is room for a positive outcome that entails freer and fairer trade, although formalization may extend into 2027 if Congressional approvals are necessary. Downside scenarios involving bilateral arrangements or threats of U.S. withdrawal are manageable and would still likely result in preferential terms for Mexico, albeit with less clarity and continued uncertainty.
On the electoral front, the second quarter of 2026 will feature consequential votes in Hungary, Peru, and Colombia. In Hungary, the opposition Tisza party continues to lead in polls, increasing the likelihood of an end to the 16‑year Fidesz era under Viktor Orbán in the April 12 parliamentary election. Given the structure of Hungary’s political system, a sizable Tisza victory will be critical to mitigate transition and governability challenges, with one of its earliest priorities expected to be the release of roughly €6 billion in EU funds. In Peru, the outcome of the April 12 first round remains uncertain in a highly fragmented field with over 30 presidential candidates, though familiar right‑leaning figures lead in polls. A second round scheduled for June 7 is widely anticipated. Investors will be closely assessing commitments to the country’s robust monetary and fiscal frameworks. The first round of Colombia’s presidential election is scheduled for May 31, with a likely second round run-off between the top two candidates on June 21. Senators Paloma Valencia (right-wing with centrist appeal) and Ivan Cepeda (left-wing, supported by incumbent President Petro) appear to be the two candidates who are in the best position to make it to the likely presidential runoff in June, signaling a binary market environment in the coming months. Political “outsider” Abelardo de la Espriella, who is ideologically to the right of Ms. Valencia, is another competitive candidate, but his likely limited appeal to centrist voters could prove to be a liability in a runoff against a unified left behind Mr. Cepeda. Markets have welcomed the emergence of a path for a right-wing candidate to win the presidency and a center-dominated Congress following March’s legislative elections; however, the competitiveness of leftist candidate Cepeda, who enters 2Q leading most polls (supported by a still popular President Petro), is likely to keep investors on the cautious side during the quarter.
Investment Strategy and Outlook
In a world of accelerating volatility, deepening fragmentation, and widening dispersion, the case for a disciplined, differentiated approach to emerging markets has rarely been more apparent. The left-tail geopolitical scenario we identified at the start of the year materialized in February, and its consequences compounded as the conflict persisted – confronting investors with a choice that passive, benchmark-anchored strategies are structurally ill-equipped to make: how to protect against a potentially deepening adverse scenario while preserving the capacity to act when dislocations create genuine opportunity. The answer, in our view, lies not in choosing between defense and offense, but in building a portfolio architecture that pursues both simultaneously – and in maintaining the analytical discipline to distinguish between assets whose prices have moved because their fundamentals have deteriorated and those that have simply been caught in the broader risk-off tide.
That distinction is particularly consequential in the current environment where the shock is asymmetric by design. The conflict has created a meaningful divergence in the fortunes of individual countries, sectors, and issuers – between energy exporters and importers, economies with fiscal flexibility and those without, and corporate borrowers with hard-currency revenues and those exposed to local cost pressures. This is not a moment for broad macro calls or index-level positioning. It is a moment for the kind of granular, bottom-up differentiation that has always been at the heart of what we do, applied with a heightened awareness of tail risk and a correspondingly higher bar for new risk-taking.
Looking ahead, our investment stance is shaped by three considerations. First, capital preservation remains the priority. The range of plausible outcomes for the second quarter remains wide, and the asymmetry of the downside – where a breakdown of the ceasefire or failure to sustain open energy supply channels could produce a second leg of spread widening and further FX pressure in vulnerable markets, argues for maintaining structural safeguards and keeping powder dry. Second, dispersion is an opportunity. Within that cautious overall posture, selective deployment in credits and markets where price has overshot fundamentals is both appropriate and potentially highly rewarding. Third, agility matters. A fragile ceasefire agreed in the final hours before publication is a reminder that the situation’s trajectory has proved impossible to forecast with precision, and the ability to adjust positioning quickly as the situation evolves, whether toward resolution or escalation, is itself a source of return. In volatile environments, patience and precision, not paralysis, define the path to compounding.
Multi-Asset
The first quarter of 2026 brought a volatile backdrop for emerging markets credit, shaped by escalating geopolitical tensions, stress in U.S. private credit markets, and growing uncertainty around the trajectory of global monetary policy.
EM credit spreads were broadly contained through the first two months of the year but came under meaningful pressure in March as risk sentiment deteriorated. Spread widening was most pronounced in investment-grade hard currency sovereign debt, where even the highest-quality names repriced lower. Mounting stress in U.S. private credit, including rising defaults, fund gating, and forced markdowns for several high-profile semi-liquid vehicles, raised contagion concerns and weighed on broader credit appetite. These dynamics were compounded by Middle East tensions late in the quarter, which injected further volatility into risk markets and prompted a rotation into safe-haven assets. In this environment, our theme of volatility continued to play out, reinforcing the value of a diversified, absolute-return-oriented approach.
The opportunistic sleeves were meaningful contributors during the quarter, led by developments across both credit and equity. In opportunistic credit, a large Brazilian energy company progressed through a complex restructuring process. After initial rescue discussions between its two major shareholders broke down over disagreements on capital contributions, one shareholder committed to a standalone capital injection while the other stepped back from direct negotiations. The company subsequently filed for an out-of-court restructuring covering the bulk of its unsecured financial debt, followed by a parallel cross-border filing to protect its international creditors. At current valuations, we believe there is limited downside and meaningful potential recoveries as the process advances. In opportunistic equity, a competitive bidding dynamic around a Latin American E&P company, which we had flagged in prior commentaries as a strong activist-driven thesis, resolved favorably when a second bidder emerged, sparked a bidding war, and ultimately prevailed at a significant premium to the original offer. The transaction is expected to close in the second quarter, after which the company intends to distribute net proceeds to shareholders.
Special situations produced mixed results. Venezuelan sovereign debt benefited from updated scenario analysis reflecting increased U.S. pressure on the regime, with probability weightings shifting toward a restructuring or change-in-regime outcome. Separately, an investment treaty claim against a Latin American sovereign received an adverse ruling on the merits. While the decision was disappointing, the claimants retain the right to seek annulment, and our preliminary assessment suggests there may be a reasonable basis to pursue that path. Asset valuations have been updated to reflect both developments.
Performing public credit faced headwinds in the quarter, particularly in March as spread widening across the investment-grade EM sovereign complex weighed on returns. The experience underscored the value of the multi-asset approach: while public credit marked to market amid broader risk-off sentiment, the private credit, opportunistic, and special situations sleeves, each driven by idiosyncratic catalysts rather than market beta, continued to generate positive contributions. This lack of correlation across the portfolio’s components is by design, and quarters like this one illustrate how the barbell structure can absorb turbulence in one area while continuing to compound in others.
Private credit continued to generate steady carry with no material changes during the quarter. The pipeline remains active, and we anticipate potential additions in the near term.
On the hedging front, the quarter saw active management of tail risk. In February, we initiated a credit hedge against growing stress in private credit markets and the broader credit complex. As volatility picked up but spreads remained contained, we monetized the position and rotated proceeds into equity market tail protection as Middle East tensions raised the prospect of disorderly conditions. By quarter-end, we partially realized gains on the equity hedge, retaining a portion of the position into April should further deterioration materialize. The ability to dynamically manage hedges, rotating across asset classes as risks evolved, was a meaningful contributor to the quarter and exemplified the flexibility embedded in the strategy’s design.
Looking ahead, the pipeline across both private credit and special situations offers several attractive opportunities that may enter the portfolio in the coming months. In opportunistic credit, the Brazilian energy restructuring remains in its early stages and we expect further catalysts as creditor negotiations advance. Volatility continues to be the defining feature of the current environment, and we believe the strategy’s blend of steady yield and opportunistic, catalyst-driven positions remains well suited to navigate it.
Capital Solutions
Emerging markets enter the second quarter amid evolving geopolitical dynamics and continued policy uncertainty. Developments in the Middle East have introduced renewed volatility in energy and logistics markets, contributing to some repricing of inflation expectations and a more cautious policy stance. Global growth remains uneven, with some economies showing resilience while others face tighter financial conditions. Looking ahead, supply-side pressures may keep inflation above target in certain markets, while softer growth could support a gradual resumption of monetary easing in others, pointing to a more differentiated macro environment.
Separately, credit markets increasingly reflect divergence across segments of the private credit landscape. In developed markets, strong capital inflows have led to pricing competition, higher leverage, and weaker lender protections. More recently, liquidity pressures and pockets of underperformance have highlighted structural mismatches between asset duration and investor liquidity, particularly as it relates to semi-liquid vehicles such as interval funds, tender-offer funds, and non-traded BDCs. These dynamics have not impacted our strategy, which remains focused on disciplined underwriting, strong collateral, and amortizing structures supported by long-term institutional capital.
Against this backdrop, the portfolio and our deployment remain well positioned from the standpoint of both stock and flow. Existing exposures continue to perform in line with expectations, with no direct exposure to the Middle East or Asia, which are the regions most affected by the current situation. Capital deployment has become more selective, reflecting a cautious stance, with pacing moderated to maintain discipline on structure, pricing, and risk-adjusted returns. On the other hand, we recognize that it is in this type of volatile environment that opportunities usually arise for our capital.
Emerging market high-yield corporate primary issuance (excl. financials) reached approximately $60 billion during the quarter, though activity slowed materially in March (~$6 billion, per BondRadar). Companies continued to prioritize USD-denominated financing amid elevated local funding costs, with widening spreads and a more cautious market tone pointing to a more selective environment going forward.
Regionally, Latin America remains a core focus, with opportunities increasingly driven by country-specific fundamentals. The portfolio is defensively positioned, with limited exposure to external trade volatility and an emphasis on USD-based structures, short-duration credit, and resilient sectors. In this context, select jurisdictions continue to offer attractive opportunities despite a more uncertain policy backdrop.
Mexico, the largest country exposure, continues to benefit from nearshoring and trade integration, supporting its role as a key manufacturing and logistics hub despite more moderate growth (~1.5% expected in 2026). Inflation remains near the upper end of the central bank’s target (~4.0%), limiting further easing following prior rate cuts (~7%), while fiscal accounts and activity remain stable. A pragmatic approach to U.S. relation, coupled with continued focus on domestic energy, supports both sovereign and corporate credit. The portfolio remains focused on industrial real estate, SME lending, and infrastructure linked to supply chains and energy resilience.
Brazil maintains a constructive macro backdrop, with stable growth (~1.5-2.0%), moderating inflation (~3.5-4.0%), and still-elevated policy rates despite the start of an easing cycle. External risks are mitigated by a diversified export base and relatively closed economy (~35% of GDP in trade), while central bank policy supports currency stability. High local funding costs continue to drive demand for USD financing among corporates with hard-currency revenues. The portfolio focuses on low-volatility sectors, diversified commodity exposure, and collateral-backed structures for high-quality borrowers.
Türkiye remains a selective opportunity set, supported by strong growth (~+4%) and elevated local rates (~35-40%), sustaining demand for USD financing. While inflation remains high (~+30%), risks are mitigated by corporates with stable foreign-currency revenues, primarily linked to Europe. Opportunities are concentrated in export-oriented companies with conservative leverage and clear liability management needs, where USD structures support balance sheet optimization.
Across the rest of Latin America, opportunities are driven by fundamentals, with a focus on structure and asset quality. Peru offers a relatively stable backdrop despite upcoming elections, supporting export-linked and asset-backed strategies with an attractive growth profile and upcoming capex cycle, while Colombia presents a more complex outlook, favoring structures with strong cash flow visibility and credit protections. The portfolio remains focused on resilient platforms such as export-oriented SME lending and pension-backed payroll financing, supported by strong collateral and currency protections. Improving currency stability has facilitated access to USD-based financing, while in Costa Rica, opportunities remain centered on real estate projects driven by external demand and secured by high-quality collateral.
Overall, Capital Solutions deployed approximately $167 million during the quarter through a mix of new investments, loan-upsizes, and platform financings. Deployments were diversified across sectors including financials, real estate, and infrastructure, and across geographies including Mexico, Costa Rica, and Colombia. At quarter-end, outstanding commitments stood at approximately $290 million, with a pipeline of $664 million in advanced due diligence and over $1.6 billion in early-stage opportunities.
The pipeline spans a diverse set of sectors and geographies. Key opportunities include real estate across Mexico, Costa Rica, Chile, and the Dominican Republic; financial services in Colombia, and Mexico, mining in Peru and consumer lending in Brazil, Central America, and Africa. We are also evaluating investments in agribusiness and retail in Brazil, Peru, and Chile, as well as opportunities in transportation, energy, and infrastructure across Chile, Colombia, and Türkiye.
Emerging Markets Debt
Emerging markets debt entered 2026 from a position of renewed structural strength. Through January and into February, the asset class tracked those favorable conditions, with hard currency sovereigns and corporates broadly positive and local markets extending the momentum of 2025. The attacks came on the final day of February, leaving March to absorb the full weight of what that meant for growth, inflation, and the global energy order. U.S. 10-year Treasury yields rose approximately 39 basis points over the quarter as markets recalibrated their expectations for both growth and inflation, and rates movement weighed heavily on duration-sensitive EM assets alongside the direct spread impact. The EMBI Global Diversified Index ended the first quarter down 1.26%, the CEMBI Broad Diversified Index was down 0.21%, and EM local currency sovereign indices were more meaningfully negative as FX weakness compounded the rates move. The one exception, and an important one, was the CEMBI Broad Diversified High Yield Index, which posted a positive return for the quarter – the only segment across the EM fixed income universe to do so – supported by idiosyncratic credit dynamics, including meaningful tailwinds for energy-linked names that are direct or indirect beneficiaries of the oil price environment.
That distinction matters and shapes our thinking for the quarter ahead. The spread moves of the first quarter were far from indiscriminate: sovereign high yield widened approximately 51 basis points in March, compared to 22 basis points in investment-grade sovereigns and 12 basis points in both investment-grade and high-yield corporates. Dispersion was the defining characteristic, not a broad-based sell-off, and that pattern is likely to persist and intensify as the second quarter unfolds. The shock creates genuine winners and losers within the EM credit universe – not only in energy, where producers outside the conflict zone are clear beneficiaries, but across petrochemicals, fertilizers, and agricultural supply chains where the ripple effects of disrupted Middle Eastern production and logistics are beginning to register. Food security is increasingly a systemic concern as the conflict intersects with key planting season timelines and fertilizer supply routes, adding a layer of inflationary pressure that extends well beyond the energy complex. The ability to identify and differentiate across these dynamics is central to generating returns in this environment.
Within hard currency, our focus remains on credits where fundamental quality has not deteriorated, but where market prices have overshot to the downside in response to macro sentiment rather than issuer-specific developments. In sovereign high yield, the widening of the first quarter has created pockets of value – though selectivity is essential, as the same energy shock that creates pricing opportunities in resilient issuers continues to exert real pressure on those with high import dependence, limited fiscal flexibility, and near-term refinancing requirements. The corporate credit picture warrants a more nuanced read. The CEMBI High Yield Index was the only segment to post positive returns in the first quarter, supported in part by idiosyncratic tailwinds in the energy and related sectors, but also by technically favorable supply-demand dynamics that have kept spreads well contained relative to the broader macro backdrop. That resilience is notable, but also raises a flag. Corporate high yield spreads remain tight by historical standards, and while the announced ceasefire has introduced a degree of near-term relief, we are attentive to the risk that a segment that has so far been insulated by technicals rather than a fundamental re-rating, could find itself vulnerable to a catch-up move should the current pause prove short-lived or incomplete. We believe selectivity within corporate high yield by focusing on names where idiosyncratic drivers are strong enough to withstand a deterioration in the broader tone is more important now than at any point in recent quarters.
Within local currency markets, we recognize that this remains a higher-beta part of the EM fixed income universe and one that is likely to remain sensitive to headline risk as the conflict’s trajectory continues to evolve. The ceasefire introduces cautious grounds for optimism, but the practical reopening of Hormuz is expected to be gradual, questions around Lebanon’s status remain unresolved, and the two-week time horizon means that energy supply chain uncertainty has not been removed – only, potentially, deferred. Local markets could face renewed pressure from both the rates and FX channels should the fragile arrangement breakdown. That said, real yields in select EM economies remain genuinely elevated, providing some cushion against the cost-push inflationary dynamics of the energy shock, though the degree of that buffer varies considerably across the universe. We are focused on countries where real rate differentials are credibly anchored, central bank independence is intact, and the external position does not create acute vulnerability to an oil-driven terms-of-trade shock. Brazil and Mexico continue to screen favorably on these metrics. Energy-importing economies with constrained external positions – particularly across parts of Emerging Asia – warrant more caution for as long as Hormuz flows remain materially disrupted.
More broadly, the second quarter will reward patience and precision over activity. Volatile, headline-driven markets create genuine opportunities for capital that can distinguish between dislocation and deterioration, and we believe the current environment offers both in different parts of the universe. Our orientation is toward capital preservation first, with selective deployment in the credits and markets where our analysis gives us the conviction to act. That balance – disciplined caution combined with readiness to engage when the price is right – is at the heart of what a better approach to emerging markets looks like in practice.
Special Situations
The Special Situations team remains focused on effectively managing and monetizing our existing portfolio of assets in emerging markets – including Brazil, Mexico, Peru, Argentina, Venezuela, and Puerto Rico – as well as in developed markets such as the United States and the United Kingdom.
Across the litigation finance sector, we continue to identify compelling opportunities in secondary transactions involving legal assets, law firm portfolio financing, and claim funding. Our established network across the United States, Europe, and Latin America continues to generate attractive opportunities outside of litigation finance that offer strong return potential alongside robust credit protections, including proprietary insurance structures, completion guarantees, and other credit enhancements. As always, we seek to structure these transactions with insurance solutions to mitigate downside risk.
Beyond litigation finance, we remain focused on potential digital infrastructure opportunities, especially given the multi-year supply shortage of AI data center capacity across the United States. In line with this theme, we have executed agreements providing for up to 455MW of power with one of the nation’s largest power producers. We have also recruited an experienced executive team to work alongside Gramercy to execute a business strategy focused on co-locating data centers adjacent to their existing electrical infrastructure. We are currently finalizing vendor proposals with the assistance of a leading consulting firm and believe the demand for corporate AI is strong, with data sovereignty and privacy becoming ever more critical.
Conclusion
The second quarter of 2026 is defined by a geopolitical crisis whose full economic consequences are still accumulating and whose resolution– as the fragile ceasefire announced at the time of writing this illustrates – remains uncertain. The case for constructive engagement with emerging markets debt has not disappeared – if anything, the structural advantages of the asset class relative to developed markets have continued to widen as fiscal discipline erodes across the major economies and the EM credit universe continues to demonstrate the resilience that years of hard-won reform have built. The near-term path requires a level of discipline, selectivity, and active risk management that passive or benchmark-anchored approaches simply cannot provide.
Our response to this environment is the same as it has been in each prior episode of disruption: test every position against a range of scenarios rather than a single central forecast, maintain the structural protections that prevent any single development from becoming an irrecoverable loss, and preserve the flexibility to lean into the asymmetric opportunities that volatile markets create. A two-week ceasefire, if it holds and deepens, would meaningfully alter the probability-weighted outlook; if it fractures, the discipline of our positioning means we are not exposed to the asymmetric downside that a more aggressive reallocation would have introduced. Either way, the multi-asset architecture of our approach remains the right instrument for the moment. The multi-asset architecture – spanning performing credit, private credit, opportunistic credit and special situations – is built for precisely this kind of environment, where the components that face the most near-term pressure are offset by those whose returns are driven by idiosyncratic catalysts and structural protections rather than market beta.
What we do know, with conviction, is that the EM universe – anchored by real yields that remain among the highest globally, improving fundamentals relative to the developed world, and a technical picture that is among the cleanest we have seen – offers a compelling foundation for disciplined investors willing to do the work to differentiate the resilient from the vulnerable. We will continue to do exactly that, maintaining a careful balance between capital preservation and the selective pursuit of the opportunities that this environment, in time, will offer in greater abundance. Gramercy’s Better Approach to Emerging Markets is built for precisely this moment.
About Gramercy
Gramercy is a global emerging markets alternatives investment manager with offices in West Palm Beach, Greenwich, London, Buenos Aires, Miami, and Mexico City and dedicated lending platforms in Mexico, Türkiye, Peru, Pan-Africa and Brazil. The $7.4 billion firm, founded in 1998, seeks to provide investors with a better approach to emerging markets, delivering attractive risk-adjusted returns supported by a transparent and robust institutional platform. Gramercy offers alternative and long-only strategies across emerging markets asset classes, including multi-asset, private credit, EM debt and special situations. Gramercy’s mission is to positively impact the well-being of our clients, portfolio investments, and team members. Gramercy is a Registered Investment Adviser with the US Securities and Exchange Commission (SEC) and a Signatory of the Principles for Responsible Investment (PRI). Gramercy Ltd, an affiliate, is registered with the UK Financial Conduct Authority (FCA).
Contact Information:
Gramercy Funds Management LLC
Phone: +1 203 552 1900
www.gramercy.com
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This document is for informational purposes only, is not intended for public use or distribution and is for the sole use of the recipient. The information set forth herein and any opinions herein do not constitute an endorsement, implied or otherwise, of any securities, nor does it constitute an endorsement with respect to any investment area or vehicle. It is not intended as an offer or solicitation for the purchase or sale of any financial instruments or any investment interest in any fund or as an official confirmation of any transaction. Opinions, estimates and projections in this report constitute the current judgement of Gramercy as of the date of this report and are subject to change without notice. All market prices, data and other information, are not warranted as to completeness or accuracy and are subject to change without notice at the sole and absolute discretion of the Investment Manager. Gramercy has no obligation to update, modify or amend this report or otherwise notify a reader hereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Certain statements made in this presentation are forward-looking and are subject to risks and uncertainties. The forward-looking statements made are based on our beliefs, assumptions and expectations of future performance, taking into account information currently available to us. Actual results could differ materially from the forward-looking statements made in this presentation. When we use the words “believe,” “expect,” “anticipate,” “plan,” “will,” “intend” or other similar expressions, we are identifying forward-looking statements. These statements are based on information available to Gramercy as of the date hereof; and Gramercy’s actual results or actions could differ materially from those stated or implied, due to risks and uncertainties associated with its business. Unless otherwise stated, all representations in this presentation are Gramercy’s beliefs based on sector knowledge and/or research. Past performance is not necessarily indicative of future results. Any reference to net returns reflect the deduction of management fees, carried interest, unconsummated transaction fees, professional fees, organizational fees and interest. Such fees and expenses will reduce returns to investors and in the aggregate, may be substantial. References to any indices are for informational and general comparative purposes only. There are significant differences between such indices and an investment program of Gramercy. A Gramercy Fund may not invest in all or necessarily any significant portion of the securities, industries, or strategies or represented by such indices. Indices are unmanaged, and their performance results do not reflect the impact of fees, expenses, or taxes that may be incurred through an investment with Gramercy. Returns for indices assume dividend reinvestment. An investment cannot be made directly in an index. Accordingly, comparing results shown to those of such indices may be of limited use. This presentation is strictly confidential and may not be reproduced or redistributed, in whole or in part, in any form or by any means. © 2026 Gramercy Funds Management LLC. All rights reserved.