Mexico City’s booming industry has made its country’s debt attractive to both local and foreign investors
As with any investment, your capital is at risk.
Emerging Markets (EM) local currency debt is often overlooked. Yet today it offers high income at attractive valuations, benefitting from supportive fundamentals, favourable macroeconomic conditions, and long-term resilience. For multi-asset clients who need diversification and yield, it’s a timely opportunity to consider increasing allocations.
Attractive yields with manageable risk
'Emerging markets' is a catch-all name for a broad and well-diversified set of countries at different stages of development, from AA-rated Czech Republic to the BB-rated Dominican Republic.
Yields in EM local currency bonds are much higher on average than in developed market bonds. However, it is our belief that this yield overcompensates for the risk of this investment-grade asset class.
This yield can be enhanced by returns from capital as EM central banks continue their cutting cycles.
Strong and more predictable fundamentals
The macro picture across EMs has improved meaningfully. Many countries now run primary fiscal surpluses, have healthy foreign exchange reserves, and have brought inflation back to target – or are clearly moving that way. On average, debt sits around 54 per cent of GDP, versus more than 100 per cent in many developed economies.
Mexico is a good example. It combines fiscal discipline, competitive manufacturing, and a prudent central bank. Market plumbing has improved too: better liquidity, longer maturities, and a bigger local investor base make markets less vulnerable to sudden outflows. A 10-year Mexican bond is yielding a little over 9 per cent today and inflation is 3.5 per cent.
High real yields protect against volatility
The higher yield begs the question as to whether this is compensation for higher inflation in EMs. However, inflation-adjusted yields, or ‘real yields’ in EM local currency bonds are still well above those in developed markets. That large real-rate cushion helps protect against global rate volatility and is a key reason why we see this asset class as attractively valued. The volatility of EM local bonds is well below EM equities, and even lower than US high yield.
Some markets, such as South Africa and the Dominican Republic, offer yields above 10 per cent while inflation is nearer 3 per cent – real yields of 7 per cent, versus close to 0 per cent in the UK.
Record inflows and improving resilience
EMs have shown resilience through recent global shocks. IMF programmes, independent central banks, deeper domestic markets have lowered external risks. These structural anchors help make the asset class more stable than many might expect.
In 2024, about 73 per cent of EM sovereign rating changes were upgrades, while large, developed issuers such as the US and France saw downgrades.
All this evidence of the benefits of EM local currency bonds has meant that flows are turning. After years of under-ownership during the strong-dollar period, investors are moving back into EM local debt. Fund inflows are at record levels, with strong interest in Asian and Global strategies.
Bottom line
The Baillie Gifford Monthly Income fund seeks diversified sources to deliver resilient, regular distributions for clients. EM local currency debt combines high yields, better fundamentals, attractive valuations, alongside improved resilience, and rightly merits renewed attention today.
Baillie Gifford Monthly Income Fund
Annual past performance to 30 June each year (%)
| 2021 | 2022 | 2023 | 2024 | 2025 | |
| Baillie Gifford Monthly Income Fund B Inc | 17.0 | -5.5 | 4.0 | 6.7 | 5.8 |
| Sector Average* | 17.3 | -7.2 | 3.3 | 11.8 | 5.5 |
Source: FE, Revolution. Net of fees, total return in sterling. *Investment Association Mixed Investment 40-85% Shares Sector
Past performance is not a guide to future returns.
The Fund has no target. However you may wish to assess the performance of both income and capital against inflation (UK CPI) over a five-year period. In addition, the manager believes an appropriate performance comparison for this Fund is the Investment Association Mixed Investment 40-85% Shares Sector.
Important information and risk factors
This communication was produced and approved in September 2025 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, and Baillie Gifford and its staff may have dealt in the investments concerned.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Investment markets can go down as well as up and market conditions can change rapidly. The value of an investment in the Fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.
Market values for illiquid securities which are difficult to trade, or value less frequently than the Fund, such as holdings in weekly or monthly dealt funds, may not be readily available. There can be no assurance that any value assigned to them will reflect the price the Fund might receive upon their sale. In certain circumstances it can be difficult to buy or sell the Fund’s holdings and even small purchases or sales can cause their prices to move significantly, affecting the value of the Fund and the price of shares in the Fund.
Derivatives may be used to obtain, increase or reduce exposure to assets and may result in the Fund being leveraged. This may result in greater movements (down or up) in the price of shares in the Fund. It is not our intention that the use of derivatives will significantly alter the overall risk profile of the Fund.
The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced.
Further details of the risks associated with investing in the Fund can be found in the Key Investor Information Document or the Prospectus, copies of which are available at bailliegifford.com.
