Myth 1: Emerging Markets is a riskier asset class
While emerging markets are certainly not risk-free, the difference between emerging market (EM) and developed market (DM) assets is often overestimated. Recent dynamics are putting that perception to the test: EM economies’ credible monetary and fiscal policy of recent years (that’s driving positive credit-rating momentum, now that the post-COVID default cycle is over) stands in stark contrast to what’s going on in some of the world’s most ‘developed’ economies: unpredictable policymaking and unsustainable public finances.
Grant Webster, Co-Head of EM Sovereign & FX: Crucially, this has shifted DM debt into a more volatile regime, blurring the traditional EM/DM divide. For fixed income investors, this matters: at current yields, DM debt would need to make significant capital gains to deliver the risk/return outcomes investors have come to expect; by contrast, in EM debt markets, elevated yields provide most of what is needed to match historical experience. Combine this with a more balanced global growth outlook and easing US dollar strength, and the case for an updated view on EM is even stronger.”
Turning to the corporate sector, with an overall rating of BBB-, the EM credit market is substantially higher in quality than the US high-yield market, to which it is often compared. Yet the compensation for risk is notably higher in EM. Alan Siow, Co-Head of Emerging Market Corporate Debt: “This asset class is rife with misconceptions and investors get paid a premium for lending to some very robust companies that have global revenue streams but just happen to be based in a ‘risky’ country.”
The often-overlooked fundamental strength of EM companies – which typically have relatively low leverage and robust balance sheets – helps to explain why the number of defaults in DM (including some high-profile names) has dwarfed the number seen in EM in the past year or so, according to S&P data.
Similar misconceptions around the EM vs. DM risk/reward profile extend to the private debt market, yet EM private debt can provide consistent returns and surprisingly low loss rates.
Alper Kilic, Head of Alternative Credit: “Lenders in the untapped EM private debt market are in a strong position when negotiating deal terms, from contractual income to investor protections. Investors can afford to be conservative, e.g., by focusing on senior-secured debt with collateral-protected deals and counterparties with conservative balance sheets.”
As for the EM equity market, today’s investors are buying a more diverse and higher-quality asset class following the significant evolution seen over the past decade. Furthermore, several key drivers of underperformance over the past decade appear to have reversed. Varun Laijawalla, Co-Portfolio Manager, Emerging Markets Equity: “First, EM indices underwent some large index rebalancing events, with Chinese equities entering the index at peak or high valuations and then subsequently derating meaningfully; today, significant share buy-back activity among Chinese companies is having the opposite effect. Secondly, the US dollar headwind looks set to fade, or even turn into a tailwind, for EM. The next decade is unlikely to look like the last.”
Myth 2: Emerging markets is a quasi-bet on China
While China remains an important part of the EM equity opportunity set – and significant positive shifts have taken place in the Chinese market (e.g., reduced prominence of state-owned enterprises) – the diversity of the asset class has risen considerably over the past ten years. The increasingly relevant EM ex-China universe is characterised by very different political backdrops in emerging Asia, Latin America and the Middle East – resilient economies where ease of doing business is typically high.
While Asia remains a major component of the index, with India’s weight doubling in the past five years, some of the smaller index constituents also warrant attention. Among the strongest structural stories is the UAE: this economy’s trading agreement with India (among other key trading partners), coupled with attractive equity valuations, make it an efficient way to gain exposure to the India growth story. From a more cyclical perspective, parts of Latin America are particularly interesting, e.g., Brazil with its huge pension funds that today have decade-low allocations to equities.
Laijawalla continued: “There are robust growth stories in countries across the investment universe, and EM now offers a wide range of opportunities in sectors like technology, manufacturing, and infrastructure, with plenty of companies at the forefront of global developments.”
Similarly, today’s EM Corporate Credit universe is truly global – comprised of over 60 countries and home to companies that control global market brands such as Samsung, Volvo and GE Appliances. China accounts for a mere 6% of the CEMBI index now; diversification of the asset class means it is not beholden to any single market.
Myth 3: President Trump’s tariffs will derail the EM story
Juliana Hansveden, Portfolio Manager, EM Leaders: “The global trade landscape has evolved dramatically in recent years. Exports to the US now represent just 14% of China’s total, down over 25% in the early 2010s. This is part of a broader trend for EM economies to trade more with each other as the shift to a multipolar world accelerates – their dependence on exports to the US has been steadily declining since Trump first took office.”
While signs of a de-escalation are encouraging, tariffs – wherever they eventually end up – will dent global growth. But they could prove a positive catalyst for EM assets.
“Amid the recent market turmoil, EM assets have held up relatively well as macro risks seem to be skewed towards the US, and a broad erosion of trust in US policy has weakened the dollar, providing a tailwind for emerging markets,” said Webster.
For context, in each of the past two decades, the US dollar has been a dominant driver of EM local currency debt returns. Weakness in EM spot rates against a strong dollar took a particularly heavy toll during the taper-tantrum years (2013-16) and then again in the COVID crisis (2020). Even if current tariff policy appears contradictory to the goal, it is logical that the US administration would like the dollar to weaken. A strong dollar has eroded the competitiveness of the US economy; China's economy now exceeds the US (on a Purchasing Power Parity GDP basis), and progress in the country's tech sector is shifting the balance of technological leadership – in some cases posing a direct challenge to the US.
Crucially for active investors, within the EM asset class, the impact of tariffs and slower global growth will vary by country. Hansveden continued: Some EMs may benefit from China’s reduced US market share, while others like emerging Asia and Mexico, are well placed to implement supportive policy responses. In this new world order, countries that diversify their economies, forge strong regional alliances, and skilfully navigate between different global powers are likely to emerge as long-term winners. Far from being a threat, today’s geopolitical friction could serve as a catalyst for long-term EM outperformance.
Myth 4: Innovation only happens in the US
Technology is transforming the EM equity landscape. As these new-economy companies innovate, disrupt and grow, they’re crowding out the old economy companies that are more capital intensive, less well-run, and less focused on profitability.
Siow continued: “AI (artificial intelligence) is accelerating this shift. While US firms own the intellectual property, the infrastructure which it will run on (data networks, data centres, computers and smartphones) will be largely manufactured in Asia. Asia is emerging as the world’s AI factory, driving a widening range of technology sub-sectors.”
At the start of 2025, DeepSeek, a China-made AI model, shook the tech world, bringing a new AI chatbot to market at a fraction of the price of other key global players. If DeepSeek’s efficiency gains are verified, it is likely to lead to lower investment requirements and a flattening of technology barriers at a global level. Both will implicitly benefit energy-poor regions and relative tech laggards, thereby undermining a pillar of US exceptionalism.
Laijawalla said: “India has also emerged as a new super-power in recent years and has become an innovation centre, with a boom in investable tech and internet companies. The COVID pandemic was a catalyst, accelerating trends that have been particularly beneficial to India’s corporate sector.”
Innovation also extends to sustainability. In the field of transition finance, for example, a data centre operator in India is providing high-performance computer services across Asia (through a partnership with NVIDIA) using a proprietary immersion cooling system that reduces energy and CO2 output by up to 50% and uses a fraction of the floor space vs. traditional air-cooled data centres.
“EM innovation intersects with commercial returns and sustainability goals — especially as EMs develop the infrastructure underpinning global AI and digital economies”, Matt Christ, Portfolio Manager, Emerging Market Transition Debt.
Myth 5: Corporate governance and sustainable opportunities do not exist in emerging markets
Corporate governance trends in EM in recent years are encouraging – for instance, in levels of share buybacks and dividend payouts in China. More broadly, the macroeconomic foundations underpinning EM equity markets is another area of considerable strengthening in recent years. Behind this is a steady improvement in the standard of stewardship by governments in key economies across the EM universe, resulting in structurally lower economic volatility and lower average inflation rates.
Hansveden said: “Turning to sustainable investment opportunities, financial inclusion, healthcare access, digitization and infrastructure development are just some of the structural shifts taking place across EM economies – investors can seek to tap into the opportunities these present. With a large share of the world’s unbanked population residing in EMs and so too the majority of the clean energy investment gap, this is a sizeable opportunity set.”
“Emerging markets are central to the global energy transition.” Christ stated. EMs are rich with opportunities, either through financing the energy transition of companies with credible net-zero targets and policies in place, or investing in renewable energy, where EM corporates play an increasingly dominant role. This theme is also relevant for investors seeking a sustainable tilt in their portfolios; EMs offer fertile ground for sustainable investment - from green bonds to transition finance - that support long-term global climate goals while also delivering long-term value.
