This year has already given investors a lot to contend with and we’re not even at the end of the first quarter. With rising rates, surging inflation and stratospheric increases in commodity prices, it may take some time before investors have more clarity on markets and the longer-term implications of the events of the past few weeks. However, when the clouds do lift, some familiar themes are likely to re-emerge. One of the most persistent is: where can I find income? The excessive levels of inflation and policy normalisation by developed market central banks create a challenge for anyone looking for positive real rates of income from core government bonds. Investors will have to go further along the fixed-income risk spectrum in their search. Importantly, for positive inflation-adjusted yield, they may find themselves looking to emerging market bonds. Economic shocks to the global economy and investors reducing their risk exposure would traditionally be a headwind for emerging market assets, as would rising US interest rates. A weaker growth outlook and falling demand from the developed world, especially the US, would weigh on emerging markets which are the world’s manufacturers. However, the geopolitical tensions have lifted the price of nearly all commodities as supply concerns mount. This has created cross-currents for emerging economies that are both exporters of commodities and manufacturers that rely on them. Given the rise in energy prices and industrial commodities such as copper, some emerging economies will benefit more than others. Due to the supply reductions, net exporters of certain commodities will benefit from improved terms of trade and better fiscal positions as tax revenues rise. Many Latin American countries, and the likes of South Africa, may fit into this category. These countries have also faced increasing pressure to curb spending to address rising deficits as a share of the economy. Meanwhile, the central banks in these countries are closer to the end of their rate hiking cycle rather than the start, like the US Federal Reserve, and their currencies have not exhibited nearly as much volatility as history would suggest. This gives emerging market central banks a degree of flexibility, and perhaps credibility, that their developed market counterparts are currently seeking. These factors have created some breathing room for policymakers. Does this mean emerging market bonds will offer a haven of inflation-busting income and positive risk-adjusted returns? Yes, yields will be high, but risks remain. Emerging market debt performance has historically been linked to the global economic momentum and trade cycle. When trade is increasing and commodity prices are high, emerging market bonds are in favour. The reverse is also true, and the shadow of stagflation on the global economy is likely to be cast over emerging markets debt as well. While the conflict in Ukraine isn’t expected to derail the global economy, the by-product of higher commodity prices will clearly weigh on activity in many economies and overall growth rates are likely to be lower this year. This means it’s important to take a selective approach on emerging market bonds. Differentiating between net energy and net industrial commodity exporters may be one way to assess where the risks are most manageable. Given the outlook for rising real interest rates and commodity currencies that should appreciate with commodity prices relative to the US dollar, local currency bonds are perhaps better placed than US-dollar-denominated debt. Ukraine war, inflation put China’s GDP growth target at risk In the near term, sentiment towards emerging market assets, both debt and equity, will remain constrained by the uncertain economic outlook and wavering view on how tight commodity markets may become. However, spreads on emerging markets bonds, even excluding Russia, have widened in an income-generating asset class. Clarity on the economic outlook and fading market fears over recession should support the rarest commodity of them all – income; something that has been difficult to come by in global bond markets for some time. Until that clarity is achieved, the diverse nature of the emerging bond market means there are still selective opportunities to be found for income-seeking investors. Kerry Craig is a global market strategist at JP Morgan Asset Management