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The investment landscape of 2025 has been defined by a dramatic psychological shift within Emerging Markets (EM). What began as a year marked by caution and skepticism has rapidly evolved into a fear of missing out (FOMO), driven by strong performance in local debt markets and a softening US dollar. However, navigating this environment requires looking beyond traditional labels and indices.
In a recent conversation with Robert Koenigsberger, Founder and CIO of Gramercy, we explored the cyclical nature of these markets and the nuances of opportunistic credit. With nearly four decades of experience, Koenigsberger offers a compelling argument that the lines between "developed" and "emerging" economies are blurring, creating a new paradigm for global investors.
Key Takeaways
- The "Submerging" Market Phenomenon: Developed markets are increasingly exhibiting fiscal behaviors historically associated with emerging markets, while many EM countries have adopted orthodox fiscal discipline.
- Private Credit as the New Frontier: EM private credit today mirrors the developed market opportunity from 15 years ago, offering premiums for structure and collateral rather than just liquidity risk.
- Active Management Over Indices: Rigid adherence to indices often forces investors into deteriorating assets (like pre-crisis China property or Russia), whereas an opportunistic approach uncovers deep value in distressed sectors.
- Reconstruction over Yield in Ukraine: The long-term opportunity in Ukraine may lie in financing reconstruction and public-private partnerships rather than holding sovereign bonds subject to potential restructuring.
- Geopolitics and Regionalization: A shift from globalization to regional spheres of influence (the "Monroe Doctrine" corollary) could reshape investment cases for countries like Venezuela and Mexico.
The Convergence of Emerging and Developed Markets
One of the most profound shifts in the global economy since COVID-19 has been the role reversal regarding fiscal discipline. Historically, developed markets (DM) lectured emerging economies on the importance of orthodox monetary policy and fiscal restraint. However, the post-pandemic recovery flipped this dynamic on its head.
While the US and other developed nations debated whether inflation was "transitory," emerging market central banks did not have the luxury of hesitation. They hiked rates aggressively and managed their balance sheets with a discipline that used to be the hallmark of the G7. This has led to a reclassification of global economic tiers.
"I would argue today that we have developed, emerging, and submerging. And the submerging is no longer the emerging going in and out. It's actually the developed markets that are moving towards the submerging markets."
This convergence suggests that the risk premium historically assigned to EM might be mispriced relative to the deteriorating fiscal profiles of some developed nations. Investors relying on outdated labels—"Frontier," "Emerging," or "Developed"—may miss the underlying credit realities. A country like Poland, for instance, transitioned from default to investment grade rapidly in the 1990s, a trajectory that defies static categorization.
Opportunistic Credit: China and Ukraine
The dangers of passive index investing become starkly apparent when examining major geopolitical and economic dislocations. Indices often compel capital to flow into assets based on market cap rather than creditworthiness, trapping investors in situations like the Russian invasion of Ukraine or the Chinese property crisis.
Rethinking "Uninvestable" China
In 2023 and 2024, the consensus view deemed China "uninvestable," particularly its real estate sector. Yet, for distressed credit investors, "uninvestable" often signals a peak asymmetry in risk and reward. The strategy here isn't to hope for a massive government bailout or a return to par, but to identify the developers that will restructure rather than liquidate.
If an investor buys a bond at 5 cents on the dollar, and the restructuring yields 15 cents, the return is substantial, even if the original par investor suffers a total loss. This requires a bottom-up selection process to identify firms with viable assets and a willingness to engage with creditors, rather than blindly buying the index.
The Ukraine Reconstruction Play
Similarly, the market's approach to Ukraine requires nuance. While current sovereign bonds offer high yields, there is a looming risk of a "Private Sector Involvement" (PSI) initiative—essentially a haircut imposed on private bondholders to ensure debt sustainability alongside G7 aid. This mirrors the experience of Greece and arguably Poland’s earlier restructuring.
The more compelling long-term thesis may not be in the existing debt stock, but in the massive financing required for reconstruction. Once a ceasefire or peace agreement is reached, public-private partnerships will be essential to rebuild infrastructure. This financing of the "real economy" represents a distinct, arguably more robust opportunity than speculating on the recovery value of war-torn sovereign bonds.
The New Era of EM Private Credit
As competition compresses returns in US and European private credit, emerging markets are offering a profile that looks remarkably like the developed market opportunity of 15 years ago. In DM, private credit has become commoditized, with covenants loosening and leverage rising. In contrast, EM private credit remains a lender-friendly environment.
Structuring for Resilience
The key to success in EM private credit is "beta agnostic" structuring. This involves lending to family-owned businesses that require capital but wish to avoid the dilution of private equity. By securing high-quality collateral—such as land, logistics centers, or essential infrastructure—lenders can insulate themselves from broader political volatility.
"Structure and jurisdiction only matter when you get the people wrong... If you have good people and you add good collateral to that, you get good outcomes."
For example, in Turkey, lending against physical assets like gas stations or shopping malls provides security even during currency crises. If the borrower is a reputable family business and the loan is over-collateralized with hard assets, the macro-volatility of the Turkish Lira becomes a manageable risk rather than an existential threat.
Strategic Geographies
Gramercy identifies several key jurisdictions where this "capital shortage" creates opportunities for secured lending:
- Turkey: Trade finance and asset-backed lending fill the void left by retreating banks.
- Mexico: Providing liquidity to suppliers in the oil and gas sector.
- Brazil & Peru: Opportunities in agriculture and family-owned conglomerates.
Geopolitics: The Trump Corollary and Venezuela
We are witnessing a shift from three decades of globalization toward regionalization. This trend is likely to be accelerated by US foreign policy that emphasizes the security of the Western Hemisphere—a modern interpretation of the Monroe Doctrine. This has significant implications for countries like Venezuela.
The US strategic interest in Venezuela is shifting from purely ideological opposition to pragmatic security concerns, specifically regarding migration and regional stability ("narco-terrorism"). This could precipitate a more hands-on approach to stabilizing the country. While the surface-level politics are volatile, the underlying economic asset—the world's largest proven oil reserves—remains intact.
For Venezuela to recover, a debt restructuring is the necessary first step. History shows that even regimes labeled as "thieves" or "pariahs" eventually restructure because it is the only path to re-access capital markets. Once a risk-free rate is established through restructuring, Foreign Direct Investment (FDI) can return to rehabilitate the energy sector, potentially mirroring the rapid recovery seen in Iraq's oil production post-invasion.
Conclusion: Anchoring the Portfolio
In an environment defined by Federal Reserve uncertainty and geopolitical realignments, the psychological challenge for investors is often the urge to "do something" constantly. Overtrading is a common pitfall when volatility spikes.
The antidote to this anxiety is anchoring a portfolio in high-conviction yield. Whether through private credit with strong collateral or deeply discounted distressed debt, securing a high running yield raises the opportunity cost of impulsive trading. By "planning the trade and trading the plan," investors can view volatility not as a source of fear, but as an opportunity to acquire assets at distressed prices.
For more insights on navigating these cycles, you can visit MacroHive or explore Gramercy’s research at gramercy.com.
