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Emerging market equities and debt have bested their developed market counterparts this year, as structural shifts have tilted in these regions\u2019 favor.\u00a0\u00a0<\/p>\n
These countries, on the whole, have seen lower inflation, enjoyed appreciating currencies, and benefitted from both a weaker dollar and their domestic interest rate easing cycles, which began well more than a year before those in many developed markets. \u00a0<\/p>\n
The MSCI Emerging Markets Index, which tracks large- and mid-cap stock performance across 24 emerging markets\u2019 countries, is up 29.80% year to date, as of the end of September. The S&P 500, meanwhile, rose about 14.65% during the same period, and the STOXX Europe 600 rose about 11.9%. \u00a0<\/p>\n
\u201cEM has been outperforming this year\u2014finally, right? Because it\u2019s been a very long winter,\u201d says Guilherme Riveiro do Valle, a founding partner of and a portfolio manager at ABS Global Investments who notes that since 2009, the EM trade has not been a good one\u2014until now. \u00a0<\/p>\n <\/p>\n Want the latest institutional investment industry\u2028news and insights? Sign up for CIO newsletters.<\/b> \uf061<\/p>\n <\/a><\/p>\n \u201cMost of the money has been concentrated in developed markets, especially in the U.S.,\u201d do Valle says. \u201cAnd for a good reason, right? I think the main reason that happened is because you had [quantitative easing], you had very loose monetary policies across the U.S., Europe, Japan, providing a lot of liquidity. That same thing did not happen across most emerging markets, not because they didn\u2019t want to do it, but because they could not do it.\u201d\u00a0<\/p>\n Asset manager Robeco, in a June report<\/a>, noted that emerging markets are now in a cyclically strong position\u2014these markets having recovered from post-COVID defaults, something which Robeco noted is still a challenge in developed market credit. \u00a0<\/p>\n In the fixed-income markets, EM corporates have also outperformed U.S. high-yield and global investment grade credit, according to Robeco. Eastspring Investments also noted in a report<\/a> that EM hard currency yields have remained higher than their historical averages, while offering more attractive yields to other global fixed-income segments\u2014the manager also predicted EM spreads will remain relatively stable, as this sector has a more resilient economic outlook. \u00a0<\/p>\n The report also noted that EM equities, even with their outperformance, are relatively cheap\u2014trading at 14 times forward earnings\u2014roughly 30% cheaper than developed market equities and 42% cheaper than U.S. equities. \u00a0<\/p>\n \u201cIn aggregate, you see emerging markets still trading around or below 15 times earnings, with the same type of growth in earnings you see in the U.S.,\u201d do Valle says. \u201cYou still see very attractive valuations when you compare to countries like the U.S. \u2026 The same type of growth, in some cases higher growth than the U.S., with a much lower valuation.\u201d\u00a0<\/p>\n As investors are increasingly diversifying globally, emerging markets present themselves as an under-appreciated opportunity.\u00a0\u00a0<\/p>\n \u201cWith growing discussion around the end of prolonged dollar strength and the beginning of a weaker [dollar] cycle, we see a potential for a significant boost to EM assets,\u201d says Hayley Tran, managing principal in and head of equities research at Meketa Investment Group. \u201cEM equities have historically offered both diversification and the opportunity for enhanced potential returns.\u201d\u00a0\u00a0<\/p>\n Fixed Income\u00a0<\/b>\u00a0<\/p>\n Emerging markets\u2019 fixed income is also having a resurgence\u2014especially both hard and local currency, as well as investment grade corporates\u2014in part due to rising commodities prices, \u00a0AND EM ratings upgrades, an increase in inflows into the asset class as well as a decline in the value of the dollar, notes Vontobel strategist and portfolio manager Carlos de Sousa. \u00a0<\/p>\n Mark McKeown, managing principal in and head of fixed income research at Meketa, notes that many emerging market debt investors are investing based on the theme of a weaker dollar\u2014something that bodes well for emerging markets and non-dollar assets. \u00a0<\/p>\n Rising commodities prices are also providing tailwinds for emerging markets, as these countries are generally large producers of commodities.\u00a0<\/p>\n \u201cFor fixed income \u2026 it\u2019s not about growth; it\u2019s about ability to repay debts,\u201d de Sousa says, \u201cIn this particular instance, having lower levels of industrialization, having more exports to commodities, is a plus.\u201d\u00a0<\/p>\n At least eight emerging market countries have seen their credit ratings upgraded in 2025, de Sousa notes, while at the same time, developed market sovereigns are experiencing more downgrades than usual. \u00a0<\/p>\n \u201cThis is a very rare development,\u201d says de Sousa. \u201cOver the last decade\u2014almost every single year, and in fact, almost every single quarter\u2014[emerging markets] had more rating downgrades for almost an entire decade, basically, since commodity prices declined very sharply during the second half of 2014. \u2026 Since the second half of 2023, we see the opposite.\u201d\u00a0<\/p>\n Vontobel, in a September paper, noted that in the prior three months, EM sovereigns had seen \u201c11 upgrades and two downgrades, the highest net upgrades in more than a decade.\u201d\u00a0<\/p>\n De Sousa also notes that allocators have increased their investments in EM fixed income this year, after years of outflows. \u201cStarting this year, especially since May, we have had quite a sustained flow into the asset class,\u201d de Sousa says.\u00a0<\/p>\n EM investment grade companies are exceeding the returns of U.S. corporates, according to Vontobel<\/a>. The former returned an annualized 3.3%, greater than 3.1% for U.S. investment grade corporate debt, while EM IG had lower annualized volatility\u20144.1% vs. 6.7% for the U.S., over the past decade \u00a0<\/p>\n Ella Hoxa, head of fixed income at BNY\u2019s Newton Investments, notes that there are many troubled spots in developed markets, such as the U.S., due to high deficits\u2014and these countries\u2019 currencies are also weakening. \u00a0<\/p>\n \u201cThe only area where this problem is not prevalent is in a lot of emerging markets, which are seeing the opposite effect, where you have very high real rates and inflation is falling, and you have central banks that are now engaging with a positive dynamic of appreciating currencies,\u201d Hoxha says.\u00a0<\/p>\n McKeown notes that inflation is moderating across emerging markets, which indicates the potential for further rate cuts ahead. EM countries had already begun their interest rate cutting cycles before the U.S. and other developed countries did so.\u00a0<\/p>\n \u201cAdditionally, [emerging market debt] managers note that fundamentals in EMD are strong such that overall real yields are at 20-year historical highs, and spreads are compelling vs. U.S. high-yield bonds,\u201d McKeown says.\u00a0<\/p>\n Navigating EM Risks<\/b>\u00a0<\/p>\n Emerging markets have long been perceived as riskier\u2014due to political instability, volatility and\u2014in some cases\u2014weaker corporate governance. \u00a0<\/p>\n \u201cEven though they\u2019re still perceived as being riskier, if you look at the performance of emerging market investment grade, it is a very similar performance to developed market [investment grade]: slightly higher in total returns [and lower volatility], depending on which sub asset class,\u201d de Sousa says.\u00a0<\/p>\n Uncertainty about U.S. trade policy, as well as mounting geopolitical risks and higher expected U.S. deficits, have increased risk in the developed markets, McKeown says. That could drive investors to demand higher yields from U.S. fixed income.\u00a0<\/p>\n \u201cMeanwhile fiscal discipline in emerging markets and the ability to ease policy via rate cuts in EM countries may keep EM debt supported, especially if we continue to see default rates drifting down in [emerging markets debt] and credit ratings upgrades,\u201d McKeown says.\u00a0<\/p>\n Tran notes that currency dynamics have historically been a major driver of emerging markets returns, and that for U.S.-based investors, the dollar has historically had a major effect on EM performance.\u00a0<\/p>\n \u201cMaybe the type of risk they used to see perceived as emerging market type of risk, like the government intervening and changing the rules of the game\u2014probably now you can make an argument that probably that risk exists in the U.S. as well,\u201d do Valle says.\u00a0<\/p>\n Diversification<\/b>\u00a0<\/p>\n Another potential reason to invest in emerging markets is the opportunity to diversify and not be too dependent on any single economy.\u00a0<\/p>\n \u201cThe benefit of emerging markets is that you have almost 80 countries in which you can invest, and you can always have a diversified portfolio,\u201d de Sousa says. \u201cWhen you invest in developed markets, you have way fewer countries and you have lots of higher concentrations.\u201d\u00a0<\/p>\n Additionally, do Valle notes that emerging markets are not a homogenous block: \u201cEach [country] is a different story; each one is subject to a different political cycle, economic cycle, different companies, different sectors, different themes. When you\u2019re investing in the broad emerging markets, you have also a very diversified set of countries that, in aggregate, I think, have been managed in a very prudent manner.\u201d\u00a0<\/p>\n Robeco, in a report<\/a>, highlighted the diverse investment universe of EM. For example, India and the nearby Association of Southeast Asian Nations are benefiting from strong domestic demand and digitalization\u2014while Latin America, a more cyclical region, has exposure to commodities and has attractive real yields. \u00a0<\/p>\n Allocating to EM<\/b>\u00a0<\/p>\n Asset owners are warming up to the idea of increasing their investments in EM, according to analysts and consultants. Do Valle notes that while institutional investors are increasingly considering EM investments, allocators now are more \u201crejigging\u201d their EM investments, usually replacing one manager with another, rather than increasing their exposures. \u00a0<\/p>\n \u201cAfter many years of pullback by U.S. institutional investors, we are seeing increased flows and interest in [emerging market debt], driven by a view of a weakening U.S. dollar for the first time in many years,\u201d Mckeown says, noting that U.S. institutional clients are exploring local currency emerging markets debt for the first time in years, as opposed to hard currency emerging markets debt. \u00a0<\/p>\n McKeown notes that when looking at EM fixed income, many institutional investors prefer to invest with active managers and blended strategies that allow them to invest across various fixed-income products.\u00a0<\/p>\n \u201cA blended strategy that includes sovereign and corporate debt issued in U.S. dollars, euros and local currency offers the investment manager opportunities to mitigate country, credit and currency risks through na\u00efve hedging across countries and issuers,\u201d McKeown says. \u00a0<\/p>\n Emerging market allocations are often considered in the context of the entire portfolio and typically calibrated to overall risk-return goals, Tran says: \u201cActive strategies can introduce additional volatility, which may be an important factor in sizing decisions. Ongoing rebalancing can help to maintain alignment with established targets.\u201d\u00a0<\/p>\n Tran notes that in Meketa\u2019s view, emerging markets are typically not a tactical bet, but a building block for achieving durable, long-term investment outcomes.\u00a0\u00a0<\/p>\n EM assets are not major components of institutional allocator portfolios\u2014with many of the portfolios that do report such investments holding positions that represent single-digit portions allocated to emerging market equity and fixed income. \u00a0<\/p>\n \u201cFor a great part of the last 15 years\u2014this long winter in emerging markets from 2005 onwards\u2014many consultants were recommending an overweight allocation to emerging markets, which was not a profitable one; if you look in hindsight, it was not a very good decision,\u201d do Valle says. \u201cSo I think many asset owners are still a little bit wary of that.\u201d\u00a0<\/p>\n An August white paper from State Street noted that the share of high yield\/EMD increased to 2.5% of investment portfolios in 2023 from 1.4% in 2020. State Street noted \u201cthe gap in expected returns between HY\/ EMD and public equities narrowing, the two asset classes are competing for capital, although the relatively small size of the HY\/EMD market sets a natural limit to this competition.\u201d\u00a0<\/p>\n Still, there is more interest building in emerging markets, says Dan Morgan, a multi-asset analyst at Ninety One UK Ltd. \u201cI think that it takes a little bit longer for clients to get comfortable with moving into emerging markets, but I think that seems to be the stage we\u2019re moving into now.\u201d\u00a0<\/p>\n Related Stories:\u00a0<\/p>\n Voya Fixed-Income CIO Tips Treasury Duration, Emerging Market Assets as Offsets<\/a>\u00a0<\/p>\n Investors Eye Emerging Markets for Some Relative Quiet<\/a>\u00a0<\/p>\n Emerging Market Bonds, on a Roll, Should Do Even Better, Says Ned Davis<\/a>\u00a0<\/p>\n \u00a0<\/p>\n Tags: Emerging Markets<\/a>, Equities<\/a>, Fixed-Income<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Emerging market equities and debt have bested their developed market counterparts this year, as structural shifts have tilted…\n","protected":false},"author":2,"featured_media":134634,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[175],"tags":[79,18,19,17,188],"class_list":{"0":"post-134633","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-business","9":"tag-eire","10":"tag-ie","11":"tag-ireland","12":"tag-markets"},"share_on_mastodon":{"url":"","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/134633","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=134633"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/134633\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/134634"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=134633"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=134633"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=134633"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/www.europesays.com\/ie\/wp-content\/uploads\/2025\/10\/CIO-102025-MSCI-EM-Equities-have-outperformed-in-2025-web.jpg\")
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