Resilient Emerging Markets in the Great Diversification

Despite ongoing geopolitical tensions and policy uncertainty, many emerging markets have demonstrated notable resilience, as recently noted by the IMF, driving strong year-to-date outperformance in both debt and equity versus developed markets. We believe we have entered an era in which geographic and sector diversification is back in focus amid geopolitical realignment, supply chain redesign and an intensifying technology race. This combination favours a reallocation to EMs at a time when these markets are supported by clear structural and cyclical drivers.

First, developing economies continue to grow faster than developed peers. That growth premium persisted in the first half of the year and looks set to continue, underpinning longer term return potential. Second, the US Federal Reserve has resumed rate cuts and is expected to keep easing as the US economy slows and inflation recedes, which gives EM central banks more policy room. Third, a relatively weaker US dollar is helping local currencies, lowering financing costs, improving trade balances, containing imported inflation and supporting domestic consumption. Fourth, a structural shift towards diversification away from the US dollar and the elevated policy premium on US assets — which increases volatility, particularly in bonds — makes EM risk adjusted returns comparatively more attractive.

Sentiment towards EMs is therefore improving. In the search for opportunities, EM fixed income offers attractive yields — especially local currency debt, where carry remains supportive. On the equity side, valuations are compelling, trading at meaningful discounts to developed markets and to historical averages. EMs remain a heterogeneous opportunity set: geopolitical re equilibration, tariffs and divergent domestic versus external dynamics mean outcomes will vary by market, with notable pockets of opportunity in Latin America, Eastern Europe and selected Asian countries.