Rising U.S. foreign policy influence ups the stakes on an important election year for Latin America, while uncovering important areas of value within Emerging Market (EM) sovereign debt.
Developments in Venezuela represent the most recent chapter in a renewed assertion of U.S. geopolitical influence. While the approach was somewhat unconventional, there have been clear signals of this growing influence in recent months elsewhere in the region, so markets had, to some extent, anticipated these events. We view the Venezuela intervention as part of a broader spectrum of U.S. engagement across Latin America. This was exemplified last year by the U.S. Treasury’s financial support for Argentina around the mid-term elections, as well as by ‘supportive’ rhetoric in other countries, including Honduras and Bolivia. This support coincides with a broad shift to the political Right in several Latin American countries, and, as such, remains highly relevant for 2026, given the upcoming elections in Colombia and Brazil.
Political transition this year
We don’t profess to know all the intricacies of the intervention in Venezuela, but we do know this broader theme will likely be an important driver of EM market sentiment and asset prices, especially in the Latin American region. A shift towards the political Right in much of the region has been and likely will be (for those yet to stage elections) accompanied by more orthodox economic policies, which on balance can be supportive for financial asset prices. Intervention or support by the U.S. is likely to take several forms, from the very overt example we have seen recently in Venezuela, to perhaps more subtle endorsement in other countries. Political rhetoric, coupled with possible financial commitments can support ‘favourable’ political and economic policy transitions which we think are not yet priced by the market. Indeed, market reaction to a more orthodox administration emerging from this year’s elections in Colombia and Brazil would be very positive in our view while continued U.S. endorsement of Argentina is also an important driver of investor sentiment.
Parts of EM still offer plenty of upside
The Venezuela events unveil parts of the EM sovereign debt markets that still present meaningful upside as investors see a clearer path now to debt restructuring in remaining defaulted countries, and an associated price rally in countries that are not in default but still trade at distressed levels. It is perhaps no surprise that the more distressed end of the credit spectrum rallied alongside the recent Venezuelan bond prices (e.g. Lebanon).
This comes after very strong 2025 returns in EM sovereigns (13.2%) which leaves much of the EM sovereign index looking rather expensive. While we remain constructive on EM sovereign returns this year, we do feel it is a year where investors need to be more selective on their country picks rather than a broad-based overweight to all of high yield (HY). In this context, the right level of exposure to the highly distressed part of the market will be an important driver of excess returns, and Venezuela set a good precedent so far this year.
EM offers diversification, but careful risk management matters
Taking positions on very distressed parts of the market, especially after an already strong year for HY is not without risk, of course. Therefore, it is important to size such positions correctly to ensure that if we are wrong our portfolios do not suffer excessive drawdowns. The path to debt restructuring is rarely linear and can suffer set-backs, even if the market tries to price in as much of the future as it can. One positive factor around the defaulted and a few of the remaining distressed names in the EM index is their largely idiosyncratic nature, meaning that price action is less influenced by broader developments in the wider EM sovereign index/universe. It is also the case that EM more broadly, and specifically these idiosyncratic parts of the market, are also relatively un-correlated with global macro developments, especially if we compare EM credit with U.S. Investment Grade (IG) or U.S. HY. More recently we also observe that the yield volatility of EM sovereign credit has been lower than that of DM IG and HY. These are important considerations because such EM allocations can be a good source of diversification and alpha generation for an active portfolio. As with any prudent active investment process, risk management is important and position sizing should take account of negative tail events and the ability to remain engaged in a trade (or add more exposure) if there are hiccups on the way to stabilisation.