Published: July 9, 2026
Global economic resilience was the defining macroeconomic narrative of the second quarter, paving the way for an impressive rally in risk assets. While the U.S.-Israel attack on Iran and the closure of the Strait of Hormuz pushed oil prices above $100 a barrel, threatening a global stagflationary shock, the vast majority of economies successfully navigated the risk through a combination of structural resilience, nimble policy adjustments, and drawdowns in energy inventories and international reserves. By late June, even the inflationary effects of the energy surge had begun to moderate, while second-round effects remained relatively muted.
With core economic and financial fundamentals avoiding a systemic hit, robust market technicals took the driver’s seat. Rather than triggering capital flight, mounting valuation anxieties in some overstretched corners of the U.S. and South Korean equity markets catalyzed a market rotation rather than outright investor retrenchment.
Beneath this surface calm, however, the quarter left several advanced economies grappling with structurally higher borrowing costs. Even with yields at 30-year highs, Japan continued to fight a rearguard action against persistent currency depreciation, with fewer traders seemingly concerned about FX intervention. The United Kingdom is undergoing a political realignment following the resignation of Prime Minister Sir Keir Starmer and the rapid ascent of Greater Manchester Mayor Andy Burnham, now a Member of Parliament and the Labour Party’s most popular figure. Both cases carry a nontrivial risk of cross-border financial spillovers.
The institutional highlight of Q2 was the historic leadership transition at the Federal Reserve, with Kevin Warsh succeeding Jerome Powell as Chair. Warsh quickly signaled an aggressive reform agenda, immediately establishing five internal task forces to address past institutional slippages in communication, balance sheet management, data sourcing and macroeconomic forecasting, supply-side modeling (particularly technology), and the inflation framework. In a decisive break from past practice, Warsh also demonstrated his distaste for conventional forward guidance by refusing to submit the traditional “dot plot” for the June Summary of Economic Projections (SEP).
This reform energy seems to be spreading. Other major central banks are adapting to the Fed’s playbook—most notably ECB President Christine Lagarde, who has begun shifting European monetary policy away from rigid forward guidance toward a more flexible “framework guidance.”
As we enter the third quarter, investors who once fixated on the precise path of interest rates must quickly adapt to this new central bank operating model. Rates still matter, of course; markets have already moderated their hawkish expectations after softer U.S. labor data and cooling inflation. However, as central banks move away from excessive data dependence and traditional forward guidance, volatility may well increase.
To navigate this environment, investors must complement their comfort with global fundamentals with a deeper appreciation for asset dispersion, operational volatility, and patience – especially in light of a still fluid geopolitical landscape. Moreover, there is a need for greater recognition of what was once unthinkable: a growing number of emerging economies now boast structural fundamentals on a far better trajectory than those of their advanced counterparts.
A primary challenge for investors in the second half of 2026 could well be not an absence of opportunity, but rather slow-adapting institutional mindsets. The traditional “bucketing” mindset is a particular risk, as it can sideline investment positions that are both attractive and risk-mitigating within otherwise traditional asset allocations.
“Global economic resilience was the defining macroeconomic narrative of the second quarter, paving the way for an impressive rally in risk assets.”
Global Growth: Resilience, Unevenly Distributed
When we published our previous quarterly outlook, the global economy had absorbed the initial Iran conflict shock from a position of relative strength, with global growth tracking just above 3.0%. At the time, consensus revisions were limited, reflecting expectations that the conflict would primarily generate temporary volatility, higher energy prices, and short-lived supply disruptions. We also highlighted a downside scenario in which prolonged energy market stress and broader second-round effects could pull global growth toward 2.5%. The economy has since settled between those outcomes: the shock has proved more persistent than initially assumed, though that persistence now runs mainly through fertilizer and food channels rather than crude itself, while the more severe downside has not materialized.
The U.S. has outperformed as AI-driven capital expenditure continues to underpin the private investment cycle, partially offsetting broader macro headwinds. Consumer spending remains resilient, and fiscal policy is supportive. Growth is tracking near 2.2% year-on-year this year with momentum remaining firm into the second half of the year. Strong household balance sheets and a robust labor market have supported consumer spending despite higher energy prices, though financial durability has become increasingly uneven.
Europe has evolved closer to our downside scenario with market consensus euro area growth of 0.6% year-on-year this year. The energy shock is weighing on domestic demand through weaker real incomes, higher production costs, and tighter financial conditions. Recession risks remain elevated should disruption around the Strait of Hormuz resume. The UK entered this period from a stronger starting point following strong 1Q growth, but higher inflation over the summer is expected to weigh on activity.
China has remained buoyant externally, supported by sustained demand for AI and green transition supply chains, while domestic demand continues to underperform. Retail sales contracted year-over-year in May for the first time since the post-pandemic reopening, and fiscal support moderated through April and May. We expect policymakers to accelerate special government bond issuance during the second half of the year. As strategic reserves decline, China is also likely to re-emerge as a price-sensitive oil buyer, providing support to crude prices during market normalization.
The fertilizer risks we highlighted last quarter crystallized into a meaningful supply-chain disruption. Trade in sulfur, ammonia, urea, and phosphate feedstocks through the Strait of Hormuz was severely constrained during the critical Northern Hemisphere planting season, driving fertilizer prices sharply higher across major importing markets. While shipments have begun to recover, logistical bottlenecks and shipping backlogs suggest normalization will be gradual and potentially exaggerated if the ceasefire does not hold. The Southern Hemisphere planting season which begins in September remains the next key pressure point: if supply chains fail to fully normalize over the coming months, fertilizer shortages could extend food inflation pressures into 2027.
Emerging market growth has broadly remained resilient despite the energy shock, although performance has become increasingly differentiated. Commodity-exporting economies, particularly in Latin America, have generally outperformed, while net energy importers across parts of Asia have faced greater headwinds from higher import costs and weaker external demand. Fiscal responses have varied, with some governments passing through higher energy prices while others have relied on subsidies to cushion households and businesses. As energy markets normalize, terms of trade should gradually improve for importers, although structural support for commodity prices remains intact. Importantly, many emerging market sovereigns enter this period with stronger external balances, healthier public finances, and more credible policy frameworks than during the 2022 energy and food price shock, leaving the asset class better positioned to navigate continued volatility.
Trade policy continues to evolve broadly in line with our expectations. The Section 301 process has advanced with proposed country- and sector-specific tariffs at rates of 10% to 12.5%, while the temporary 10% global tariff imposed under Section 122 is scheduled to expire this month. Although the overall tariff burden remains elevated, policy is becoming more targeted, with greater emphasis on strategic industries and perceived excess capacity rather than broad-based restrictions. We expect additional measures tied to ongoing excess-capacity investigations over the coming quarter, reinforcing continued divergence across export-oriented emerging markets as supply chains increasingly reconfigure around strategic and geopolitical considerations.
Looking ahead, we expect the broad contours of the current environment to persist. The U.S.–Iran memorandum of understanding and the partial reopening of the Strait of Hormuz remain fragile, and we expect intermittent flare-ups as both sides continue to test each other’s resolve. This week’s exchange of strikes, after which President Trump said the ceasefire may be over and revoked the waiver permitting sales of Iranian oil, is a case in point. We do not, however, expect a return to full-scale conflict. Energy markets are likely to stay volatile around these episodes, while fertilizer and food inflation continue to feed through over the coming quarters given the lagged effects of this year’s supply disruptions. The global economy is moving beyond the initial shock phase, but into a more prolonged period of structural uncertainty and cross-country divergence. In this environment, active differentiation across countries, sectors, and asset classes remains essential.
Systemic Central Banks: Data-Dependent Ambiguity
Last quarter we characterized the global policy backdrop as having shifted from accommodation to a “tightening watch,” as the military conflict in the Middle East upended the disinflationary path that had underpinned our start-of-year expectations. Entering the third quarter, the balance of risks has improved, if unevenly. The fragile ceasefire announced in early April gave way to an uneasy de-escalation, formalized in a U.S.–Iran arrangement that has begun to reopen the Strait of Hormuz, though the truce remains fragile and prone to the periodic flare-ups seen in recent weeks. The gradual reopening of that vital shipping lane is relieving the accumulated supply shortages we flagged in April, even as second-round effects continue to work through food and fertilizer markets We believe the risk of an acute stagflationary scenario that systemic central banks and markets were bracing for at the turn of the quarter has become less likely, even if it cannot be ruled out entirely while the truce is still being tested.
The tightening watch proved partly justified but considerably milder than markets had priced. The European Central Bank delivered a single 25 basis point hike in June—lifting the deposit facility rate to 2.25%, rather than the roughly 50 basis points investors had discounted at the time of our last writing. Alongside the decision, the ECB revised its 2026 headline inflation projection higher to 3.0% year-on-year while trimming its growth forecast to 0.8% year-on-year, and reiterated a data-dependent, meeting-by-meeting approach with no pre-commitment to a particular rate path. The Bank of England, by contrast, refrained from tightening and held its policy rate at 3.75%, assessing that inflation, running near 2.8% in May and expected to sit just below 3% in the third quarter, would prove less persistent than the energy shock had initially implied.
“The tightening watch proved partly justified but considerably milder than markets had priced.”
For the dual-mandate Federal Reserve, the second quarter brought both a policy hold and a leadership transition. The Committee kept the target range at 3.50%–3.75% through mid-year, describing activity as still expanding at a solid pace even as inflation remained elevated, in part reflecting energy-related supply shocks. The arrival of a new Chair has coincided with a discernible shift in communication: a sharper emphasis than markets expected on price stability as the primary objective, a preference for a clearly articulated reaction function over point forecasts, and greater tolerance for waiting on incoming data. Against this backdrop, markets have moved to price around one 25bps hike through the remainder of this year while pushing the potential resumption of cuts out toward the second half of 2027. This higher-for-longer repricing reflects the deliberate ambiguity of the new Chair’s data-dependent guidance. We would also flag renewed scrutiny of central bank independence from political interference as a factor that could, at the margin, command a modestly higher term premium in U.S. rates going forward.
Looking into the third quarter, subject to Middle East de-escalation holding and inflation outlooks improving, the policy debate could gradually rotate from “how much tightening” back toward “when, and how quickly, does easing resume”, though the answer differs markedly across jurisdictions. Three forces will govern the pace: the credibility of disinflation as energy base effects fade; the increasingly prominent debate over artificial intelligence as a supply-side and potentially disinflationary force, weighed against warnings that rapid AI-related capital formation could itself sow financial-stability risks; and the residual uncertainty around the energy complex. Our base case is that the systemic central banks converge on a broadly synchronized hold at restrictive levels through much of the quarter, rather than a swift return to broad accommodation.
A newer strand of the policy conversation, and one we believe is underappreciated, concerns financial stability. Policymakers have grown more vocal about elevated leverage across core government bond markets, equities, and less transparent segments of the system, including hedge funds, exchange-traded products, and private credit, where redemption pressures earlier in the year have only partially stabilized. The concern is that a localized shock could migrate from a contained tail risk into a broader systemic consequence. To the extent these vulnerabilities constrain how aggressively policymakers can ease even where inflation cooperates, they reinforce our expectation of a cautious, gradual normalization rather than a decisive pivot.
For emerging market economies, the second quarter played out largely as a “follow the Fed and pause” dynamic: most central banks, including those of South Africa and India, held steady, while a handful with ample real interest rate buffers, notably Brazil and Mexico, continued measured cutting. Higher energy and fertilizer prices, alongside a firmer dollar during the conflict, prompted the IMF to lift its 2026 emerging market inflation forecast to 5.5% and drove modest capital outflows concentrated in energy-importing economies. Entering the third quarter, the tentative easing of Hormuz-related pressures and the prospect of a patient Fed could open the door for select emerging market central banks with real rate cushions to cautiously resume easing, but this will be a far more differentiated process than the near-synchronized cutting cycle of 2025. As we argued last quarter, initial conditions – idiosyncratic credit metrics, fiscal credibility, and policy flexibility – will remain the decisive factors separating winners from losers among global sovereign assets, with issuers with stronger fundamentals best positioned to navigate a regime better characterized as a restrictive hold with two-sided risks than as a return to accommodation.
Geopolitics: Fluid but Stabilizing
In the Middle East, the acute phase of the U.S.–Iran war has given way to a fragile and contested truce. Following the two-week ceasefire brokered in early April, the two sides signed a memorandum of understanding on June 17 that extended the ceasefire for a further sixty days and provided for a gradual reopening of the Strait of Hormuz, with parallel negotiations to run on Iran’s nuclear program, sanctions relief, and the release of frozen assets. Shipping through the Strait is recovering but remains well below pre-war levels; spot crude, having retraced toward its late-February starting point near $70 per barrel, has bounced back to around $78 on recent comments, a reminder of how quickly the geopolitical risk premium reprices. Implementation risks are considerable: the future administration of the waterway, including Iranian demands for a formal role and transit fees, is unresolved; the parallel Israel–Hezbollah ceasefire in Lebanon remains a recurring flashpoint; and the harder questions around enrichment and Iran’s highly enriched uranium stockpile have been deferred rather than settled. Those strains are already surfacing, as this week’s exchange of strikes and the associated questioning of the ceasefire’s durability made clear. Our base case is that the truce holds through the quarter in the sense that matters most for markets, no return to full-scale war, reinforced by U.S. political incentives ahead of the November midterms. But we expect the process to be noisy, with periodic flare-ups likely as both sides test each other’s resolve, and headlines proclaiming the ceasefire over are likely to recur; we distinguish those episodes, which we consider probable, from a sustained return to conflict, which we continue to view as more unlikely.
On the Russia–Ukraine war, the de-escalation in the Gulf could free up U.S. diplomatic bandwidth over the third quarter, which we view as the most plausible near-term catalyst. Even so, we expect attritional conflict and incremental diplomacy to remain the base case rather than a decisive breakthrough, as both Kyiv and Moscow vie for a position of strength ahead of what could become a more credible diplomatic re-engagement over the next six to nine months. For progress to materialize, both sides would need to compromise on their entrenched conditions, which we believe could become increasingly possible amid mounting social and political fatigue from the five-year conflict.
“In the Middle East, the acute phase of the U.S.-Iran war has given way to a fragile and contested truce”
Despite a constructive tone at the May Trump–Xi summit in Beijing, substantive progress was limited. The U.S.-China relationship continues to be shaped by longstanding frictions around tariffs, technology controls, and critical minerals, which remain the key structural constraints. At the same time, the absence of escalation and the resumption of high-level dialogue are supportive of near-term stability. Attention now turns to President Xi’s September visit to the United States, which may provide scope for incremental progress, even if major breakthroughs remain unlikely in the near-term.
The USMCA review process is progressing in line with expectations, with two rounds of discussions between Mexico and the USTR completed and a third scheduled later this month. Key areas of focus include rules of origin, regional value content requirements and external tariff alignment on select imports from China and Southeast Asia. Negotiations could continue throughout the quarter with scope for incremental bilateral side arrangements alongside the core agreement or annual reviews. While tactical escalation from the U.S. remains possible, we expect the process to remain manageable overall, with Mexico likely to retain a broadly competitive effective tariff position.
In Venezuela, the restructuring process is beginning to take shape, with the government and its advisor, Centerview, expected to publish a debt sustainability analysis this month. Progress has been faster than previously anticipated and is reinforced by improving relations with Washington, although significant implementation and credibility risks remain. Debt restructuring, renewed engagement with the IMF and World Bank, gradual sanctions relief, and expanded economic licenses are critical prerequisites for a durable economic recovery.
On the EM electoral calendar, Colombia’s presidential contest delivered a decisive rightward shift, with hard-right outsider Abelardo de la Espriella narrowly defeating the ruling left-wing coalition’s Iván Cepeda in the June 21 runoff by under one percentage point, the closest margin in the country’s recent history. Abelardo de la Espriella will succeed Gustavo Petro and take office on August 7. The outcome points to a market-friendly orientation, with the president-elect signaling fiscal adjustment, a harder line on security, renewed investment in the hydrocarbon sector, and scope for warmer relations with Washington. That said, the pace of reforms and general governability hinge on the new administration’s ability to build and maintain alliances with the established patronage-dependent parties in Congress.
Attention this quarter now turns to Brazil, where candidacies are being formalized in July ahead of the October 4 first round of the presidential election. President Lula is seeking a fourth term against Senator Flávio Bolsonaro, son of former President Jair Bolsonaro. Bolsonaro erased a wide late-2025 deficit before a campaign-finance scandal saw momentum swing back toward the Lula camp, eroding investor hopes for a potential political/policy shift. With the fiscal trajectory the dominant market concern and every recent contest having gone to a second round, we expect Brazilian assets to remain sensitive to polling through the quarter, with a decisive runoff most likely on October 25. Taken together, the geopolitical backdrop is one of receding but still-unresolved tail risks, with outcomes diverging sharply by country, reinforcing the case, echoed throughout this outlook, for active differentiation rather than broad directional exposure.
Investment Strategy and Outlook
The first half rewarded composure. A shock large enough to threaten a stagflationary spiral instead gave way to a fragile calm, and emerging markets, directly exposed to it, held up better than expected. That calm is provisional: the truce is unresolved and prone to volatility, and we think renewed flare-ups are likely, even as neither side shows much appetite for full-scale conflict. The more lasting question is what the shock leaves behind, above all whether its inflation impulse proves persistent. On that, central banks have parted ways: some have raised rates, others have held, and a number have eased. That divergence, more than the level of any single policy rate, is what shapes the environment for global fixed income today.
Markets are left carrying two signals that are difficult to reconcile. Fundamentals, globally and within emerging markets, have held up better than the shock warranted, supported by the U.S. profit cycle, continued AI-related investment, and developing-world central banks that entered the episode with real-rate buffers and credibility intact. Against that, valuations are full: spreads sit near cycle tights and the crossover premium that once compensated for emerging market risk has largely compressed. Returns, in other words, will depend more on differentiation than on the market re-rating from here. The risks to that view are external rather than fundamental, and there are two worth watching: a firmer dollar, revived by the return of the “U.S. exceptionalism” narrative and a market now pricing some chance of Fed tightening, and the still-unsettled geopolitical backdrop. Either could widen the gap between price and fundamentals before it narrows.
“Divergence, more than any single policy rate, shapes the environment for global fixed income today”
Against this backdrop, our stance rests on three principles. First, defense comes before offense: with the margin for error compressed by valuations rather than by fundamentals, the priority is to avoid being forced to sell into weakness. Second, carry, not beta, is the engine of return; the era of broad spread compression is over, and what is left is earned through selection and structure. Third, agility matters, because the defining tension of this regime is the gap between what the market is pricing and what the fundamentals suggest, and the ability to adjust as that gap resolves, in either direction, is itself a source of return. This is not an environment that rewards reaching for duration or chasing beta into tight spreads; it rewards patience, precision, and a higher bar for new risk.
Multi-Asset
Gramercy’s Multi-Asset Strategy navigated an unusually turbulent second quarter, as the economic and financial spillovers of the Middle East conflict continued to widen. Against a backdrop defined by volatility, fragmentation, and growing dispersion, the strategy delivered steady positive performance while advancing its objective of attractive absolute returns.
Emerging market credit spreads on the highest-quality hard currency sovereigns tightened steadily even as the energy shock reintroduced stagflationary pressures to the global outlook. However, the shock improved terms of trade for net energy exporters while straining importers, reinforcing our view that dispersion, rather than broad market direction, has become the dominant theme. Monetary policy grew more complicated as several emerging market central banks paused their easing cycles, while renewed U.S. dollar strength weighed on local currency markets. Geopolitics stayed front of mind, from the Middle East conflict to dormant Ukraine peace talks and a heavy Latin American election calendar spanning Peru, Colombia, and Brazil.
“The private credit sleeve was the quarter’s most active area and a consistent contributor, as deployment accelerated across several new secured transactions.”
The private credit sleeve was the quarter’s most active area and a consistent contributor, as deployment accelerated across several new secured transactions. The strategy provided a senior secured term loan to the leading sportswear retailer and distributor across the Andean region, a decades-long exclusive regional partner of a major global athletic brand, consolidating its shorter-term debt into a single senior secured structure backed by a repeat sponsor. The team also arranged a trade receivables facility for a large Brazilian petrochemical producer, funding working capital against a diversified pool of short-term industrial receivables. Building on our earlier positioning in AI infrastructure, the strategy financed an early-stage developer of power-secured data-center projects through a senior secured bridge loan paired with an equity participation, protecting the downside while preserving upside as the platform scales. An existing Angolan exposure continued to amortize and perform well, recently moving into a more formal note structure with enhanced economics.
Special situations delivered a meaningful contribution, driven primarily by the Venezuelan complex. As noted in prior commentary, our positioning there is anchored in long-dated restructuring and recovery scenarios, and public markets continued to reward that thesis as investors increasingly priced in eventual normalization. We anticipate further procedural milestones and potential valuation catalysts across these claims over time.
Our opportunistic sleeves stayed focused on catalysts and structural change rather than broad market beta. The bonds of a large Brazilian petrochemical producer rallied as a long-running shareholder transaction cleared its final approvals and governance improved, while widening polyethylene and polypropylene spreads, driven by Middle East supply disruptions, brightened the earnings outlook into the second half. We also initiated a position in Ukraine sovereign bonds, where valuations offer an attractive yield even under a modest ceasefire scenario and embed the upside of a peace deal at little additional cost. In opportunistic equity, a Latin American energy company completed the sale of its upstream assets, transforming into a pure-play Colombian infrastructure business anchored by pipeline and port holdings and clearing the way for a sizeable return of capital to shareholders.
The performing public credit sleeve was a steady contributor, led by high-quality hard currency sovereigns as spreads across the highest-rated complex continued to tighten, with investment grade and high yield corporates adding to returns. Local currency bonds were a modest source of softness under renewed dollar strength, though we continue to see value in select local markets, particularly among net energy exporters with credible central banks. Tactical tail protection carried into the quarter expired unused, as markets proved stronger than the macro backdrop’s fat left tail had implied.
Looking ahead, we remain focused on pipeline conversion and disciplined deployment into secured lending where improving fundamentals and structural protections support attractive risk-adjusted returns, alongside catalyst-driven situations across our opportunistic and special situations sleeves. In a world of moving tails and asymmetric shocks, we believe dispersion is best met with security selection and sound structure rather than directional risk. The strategy recently reached its five-year track record, discussed in greater detail in a separate letter available to investors. We believe the strategy remains well positioned and appropriately balanced across public and private exposures for the quarters ahead.
Emerging Markets Debt
Emerging markets debt entered 2026 from a position of renewed structural strength, and the first half tested it in ways few anticipated. The conflict that began in late February concentrated its damage in March, but the recovery that followed was faster and more orderly than the shock implied. As oil retraced from its wartime highs (though it has since rebounded on renewed tensions) and financial conditions stabilized, EM credit demonstrated the resilience that a decade of reform was built to produce, ending the first half of the year in positive territory across every major segment. Hard-currency sovereigns returned roughly 3.3% and corporates around 2.2%, the high-yield parts of each leading at around 5.4% and 4.0% while investment grade sat closer to 1%; gains concentrated in lower-rated, event-driven and energy-linked names, Latin America led the regions, and the front end outperformed as investors were paid to stay short. The local currency index rose around 1.5% even as a firmer dollar offset much of its carry. That range of outcomes is itself the point: the asset class is not a single trade but many, and the diversification within it is a source of resilience in its own right.
As we enter the third quarter, rates have moved back to the center of the picture alongside a still-unsettled geopolitical backdrop The inflation impulse has fed through to the data, its persistence still contested, and the policy response has varied: some central banks have hiked, the Fed and others have held, and several in EM have eased. Markets have repriced toward a more hawkish path and now price some chance of Fed tightening. The distinction that matters is between a hike or two, which the asset class can comfortably absorb and which current yields already compensate for, and a sustained hiking cycle, which would be a materially more difficult backdrop for risk and for the asset class. We do not expect the latter, and the tightening now embedded in the curve reads to us as a risk premium rather than a forecast of one. That leaves us balanced on rates: with wide fiscal deficits and an unresolved inflation debate keeping pressure on the long end, we see little reason to reach for duration, but equally little to position aggressively against it.
“Emerging markets debt entered 2026 from a position of renewed structural strength, and the first half tested it in ways few anticipated.”
Despite tight spreads, all-in yields remain constructive. With corporate yields still above 5%, the asset class offers income it has rarely matched since before the financial crisis, and that income has kept demand broad even at these spread levels. It also cushions the downside: at today’s yields, spreads can widen materially before total return turns negative. The margin for error is thinner than in prior years.
Within hard-currency credit, selectivity is essential. The phase in which a rising tide lifted the whole index is behind us; from here, returns turn on issuer fundamentals, refinancing visibility, and event risk far more than on any further move in the market as a whole. The recent softness in parts of Brazil’s high-yield market is a case in point: the question is whether it reflects company-specific problems or something more general, and in Brazil’s case we see it as the former, though we are watching the more exposed names closely. Our focus remains on issuers whose story holds up on its own merits even if the broader tone deteriorates, and we are wary of paying full price for higher-beta credits that have tightened on flows rather than on any real improvement in fundamentals. The technical backdrop deserves attention too: the heavy inflows that followed the spring rally have leveled off, demand has favored sovereigns over corporates, and the most recent new issues have come with wider concessions and traded less well after pricing. We read these as signs of fatigue rather than reversal, but ones worth respecting.
Local-currency markets remain the higher-beta expression of the asset class, and the near-term headwind is visible: a firmer dollar, driven by stronger U.S. data and the repricing of the Fed, weighs directly on EM currencies and tends to slow inflows into the sector, a drag that should persist while the dollar stays firm. We are not inclined to oversell the buffers. The first half made the point: a local index up only about 1.5% masked enormous dispersion, with several Latin American high-yielders and parts of Central Europe posting double-digit dollar returns as currency and carry worked together, while several Asian markets fell high-single digits and the highest-carry names still finished lower once FX is accounted for. Carry is a cushion, not a guarantee. That said, real yields across much of EM remain elevated and provide some insulation against the inflation impulse, and several EM central banks have shown they will lean hawkish to defend that carry. We stay selective, favoring economies where real-rate differentials are credibly anchored, central-bank independence is intact, and the external position is not a vulnerability. Brazil and Mexico continue to screen favorably, though Mexico’s fiscal rigidity and contingent liabilities warrant close monitoring at both the sovereign and corporate levels.
More broadly, the third quarter will reward patience and precision over activity, and volatile markets tend to create opportunities for those able to tell dislocation from deterioration. 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.
Capital Solutions
Against a complex global backdrop, existing portfolio exposures continue to perform in line with expectations, and periods of market volatility and market dispersion continue to support selective deployment opportunities while maintaining discipline on structure, pricing, and risk-adjusted returns.
“Regionally, Latin America remains a core focus, with opportunities increasingly driven by country-specific fundamentals.”
Emerging market high-yield corporate primary issuance (excluding financials) reached approximately $27 billion during the quarter (per BondRadar), a ~7% decrease in issuance year-over-year compared to 2Q25. Companies continued to prioritize USD-denominated financing amid elevated local funding costs, while market conditions remained selective despite improving sentiment following earlier volatility.
Regionally, Latin America remains a core focus, with opportunities increasingly driven by country-specific fundamentals. The portfolio remains defensively positioned, with limited exposure to external volatility given its USD-based structures, short-duration credit, and diversified sectors. In this environment, select jurisdictions continue to offer attractive opportunities, supported by disciplined underwriting and a focus on downside protection.
Mexico continues to benefit from trade integration and nearshoring trends, supporting its role as a key manufacturing and logistics hub despite a more moderate growth outlook (~1.0 to 1.5% expected in 2026). Inflation has continued to moderate but remains near the upper end of the central bank’s target range (~3.5%), supporting a steady approach to monetary policy following prior rate cuts (~6.5% policy rate), while fiscal accounts and economic activity remain relatively durable. A pragmatic approach to U.S. relations and continued investment across strategic sectors continue to support sovereign and corporate credit fundamentals, while local funding conditions remain supportive of demand for structured USD financing. 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, supported by steady growth (~1.5 to 2.0% expected in 2026), moderating but still elevated inflation (~4.5 to 5.0%), and policy rates that remain high despite a gradual easing path (Selic ~14.5%). External risks continue to be mitigated by a diversified export base and relatively limited trade dependence (~35% of GDP), while a credible monetary framework continues to support macro stability. As the country approaches the election cycle, market attention remains focused on fiscal discipline and the pace of monetary normalization. High local funding costs make us very vigilant of credit opportunities in general but remain supportive of opportunities for USD financing among corporates with hard-currency revenues. The portfolio remains focused on low-volatility sectors, agribusiness commodity exposure, and asset-backed structures.
Türkiye remains a selective opportunity set, supported by continued economic resilience (~3% to 4% expected growth in 2026) and elevated local funding costs (policy rates ~35% to 40%), sustaining demand for USD financing. While inflation remains high (~32%), tighter financial conditions and a more orthodox policy framework have supported greater macro stability, although the economy remains relatively more exposed to energy prices given its import dependence. Risks continue to be mitigated through corporates with stable foreign-currency revenues, primarily linked to Europe. Opportunities remain 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 continue to be driven by country-specific fundamentals, with a focus on structure and asset quality. In Peru, the election of Keiko Fujimori over Roberto Sánchez reduces some of the policy uncertainty that had weighed on sentiment and supports greater stability, creating a more constructive environment for investment activity and private credit while leaving existing portfolio exposure well positioned. However, the narrow margin of victory and a divided Congress might temper the near-term outlook. In Colombia, the election of Abelardo de la Espriella over Iván Cepeda points toward a more market-oriented policy direction, which could support portfolio performance through a more stable FX outlook while creating selective deployment opportunities across the pipeline. Lastly, 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 $435 million during the quarter through a combination of new investments, loan upsizes, and platform financings. Deployments remained diversified across sectors including financial services, real estate, trade finance, retail, and infrastructure, and across geographies including Mexico, Peru, Chile, Colombia, Ecuador, Costa Rica, and Global EM. At quarter-end, outstanding commitments stood at approximately $620 million, with a pipeline of approximately $250 million in advanced due diligence and over $1.4 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; digital infrastructure in Colombia and Mexico; and mining in Peru. 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.
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. As in prior periods, we seek to structure these transactions with insurance solutions to mitigate downside risk. In parallel, 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 solid credit protections, including proprietary insurance structures, completion guarantees, and other credit enhancements.
Beyond litigation finance, we remain focused on digital infrastructure opportunities, particularly given the multi-year 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 in executing a strategy focused on co-locating data centers adjacent to existing electrical infrastructure and are finalizing vendor proposals with the assistance of a leading consulting firm. We believe the demand signal for corporate AI is strong, with data sovereignty and privacy becoming ever more critical, and we look forward to rolling out this strategy as these plans are finalized.
Conclusion
The third quarter of 2026 begins not with a new crisis but in the uneasy aftermath of one. The harder question now concerns the level of rates and the divergence of the policy response rather than the durability of the asset class, and much of the good news is already in the price. Our response is the one we bring to every such transition: test each position against a range of scenarios rather than a single forecast, keep structural protections in place, and preserve the flexibility to add where price and fundamentals diverge. Our base case remains constructive: we believe the Fed is more likely to hold rates than hike, and that patiently harvesting carry will continue to be the principal source of returns. At the same time, we remain mindful that valuations are tight, and have positioned the portfolio prudently so that, if we are wrong, we are not exposed to the downside that a more aggressive stance could invite.
What we hold with most conviction is less the path of rates than the case for the asset class itself. Emerging markets debt has just absorbed a major shock and come through it intact, and against a developed world steadily losing its fiscal discipline, its combination of high real yields and real breadth continues to reward investors willing to do the work to separate the resilient from the vulnerable. That is what Gramercy’s Better Approach to Emerging Markets is built to do.
“The third quarter of 2026 begins not with a new crisis but in the uneasy aftermath of one.”
Authored by
Robert Koenigsberger, Managing Partner and Chief Investment Officer
Mohamed A. El-Erian, Chair
Petar Atanasov, Director & Co-Head of Sovereign Research
Kathryn Exum, Director & Co-Head of Sovereign Research
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, Brazil and Costa Rica. 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
Investor Relations
[email protected]
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