(Bloomberg) -- Bonds from the riskiest emerging markets are set to outperform in 2024 as governments carry out the reforms needed to unlock emergency bailout financing, according to UBS Asset Management.

Financing from the International Monetary Fund and World Bank is creating opportunity in some of the world’s most-vulnerable economies — such as Pakistan, said Shamaila Khan, the firm’s head of fixed income for emerging markets and Asia Pacific. 

Defaults have also already peaked in emerging markets, she said in an interview, adding incentive to bet on recoveries. At this point, the most-troubled nations have already started to make the structural changes necessary for growth and stability, according to Khan. 

“That has helped tremendously and has allowed multilaterals to play a very big role,” especially those that needed to refinance their debts while global interest rates soared, she said. “We’ll have a few countries emerging out of default over the next few months, and that’s something I don’t think is still fully priced in.”

The $505 million emerging market hard-currency debt fund she manages has returned 5.1% over the past month, beating 90% of peers, according to data compiled by Bloomberg. UBS Asset Management oversees $1.6 trillion in investments. 

Nearly all of the best-performing bonds in developing economies this year come from high-yielding countries, including Pakistan, Argentina and Sri Lanka, according to data compiled by Bloomberg. Debt from El Salvador, which traded in distress until earlier this year, has also outperformed.

Even after this year’s rally, junk-rated government dollar bonds have more room to gain in 2024, said Khan. Argentina, where libertarian President-elect Javier Milei is set to take office this weekend, is one of the firm’s top allocations.

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