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Key takeaways
- Earnings momentum in EM equities is broadening beyond technology and North Asia, suggesting the asset class is increasingly supported by fundamentals rather than investor optimism alone.
- The macroeconomic backdrop is more resilient than in previous cycles – falling inflation, attractive real yields and improving policy credibility give EM central banks more room to manoeuvre than their DM counterparts.
- EM corporate credit has entered this period of uncertainty with stronger balance sheets and more conservative financing structures, strengthening companies’ ability to navigate volatile market conditions.
Strength in the face of adversity
Emerging markets (EM) are entering the second half of 2026 with renewed momentum. While geopolitical risks and swings in US policy remain important considerations, many emerging economies are entering this period from a position of relative strength. Improving corporate earnings are strengthening the case for EM equities and corporate debt, while falling inflation and attractive real yields provide a supportive backdrop for sovereign debt and currencies.
Improving earnings strengthen the case for EM equities
Ahead of the second-quarter earnings season, companies across the MSCI Emerging Markets Index are showing strong earnings momentum, with Korea recording the largest earnings per share (EPS) upgrades among major emerging markets, driven by its exposure to the memory and AI-server supply chains. The broadening of this momentum suggests EM equities are increasingly being supported by fundamentals rather than investor optimism alone.
While North Asia continues to benefit from structural demand tied to artificial intelligence, earnings momentum is increasingly extending beyond technology and across the wider emerging market universe. For example, Latin America and EMEA are contributing through a combination of commodity strength and improving domestic fundamentals, while record-low EM inflation and still-elevated real interest rates provide both operating leverage and policy flexibility.
Today's emerging market equity universe looks fundamentally different from the asset class investors remember from a decade ago, offering a richer opportunity set for active investors. Around 40% of the index is now represented by technology and advanced manufacturing businesses rather than the state-owned commodity and utility companies that once dominated. Yet many of these companies continue to trade at meaningful discounts to their developed market peers despite delivering superior earnings growth.
A more resilient macro backdrop
Beyond equities, falling inflation, attractive real yields and improving policy credibility are supporting a more favourable backdrop for emerging market currencies and sovereign debt. Structurally, inflation remains well-behaved across much of EM, real interest rates remain attractive, and many countries have rebuilt policy credibility – leaving emerging markets fundamentally more resilient than in previous cycles.
The macroeconomic backdrop differs meaningfully from previous periods of global uncertainty. Investors are increasingly recognising that many emerging economies are entering this period from a position of relative strength, with stronger external balances and more orthodox policy frameworks than in the past.
Behind the geopolitical noise, we are also seeing major domestic political and policy changes in emerging markets. Countries such as Argentina, Chile, Colombia, Hungary, Nigeria and Peru have all held elections over the past few years in which voters backed more orthodox reform agendas, further supporting a positive sovereign rating trajectory across EM.
Stronger foundations in corporate credit
The improving backdrop is also evident within emerging market corporate credit, where company fundamentals have remained resilient despite recent market volatility. The quality of the EM corporate universe has improved materially over the past decade: companies have generally entered this period with stronger balance sheets and more conservative financing structures, enhancing their ability to navigate volatile market conditions.
The changing environment also heightens the importance of active security selection as the cycle evolves. Credit markets are increasingly differentiating between issuers with strong fundamentals and those facing structural challenges. That environment creates opportunities for active investors who can identify resilient businesses while avoiding areas where policy uncertainty or refinancing risks remain elevated.
Emerging market corporate issuers also continue to benefit from diversified sources of funding. The ability to access domestic funding markets that have become deeper and more developed over time is a key source of resilience.
A broader opportunity set
Taken together, improving earnings, resilient economies and stronger corporate and sovereign fundamentals suggest the investment case for emerging markets is strengthening. The opportunity is no longer driven primarily by valuations or shifts in the US dollar, but increasingly by improving earnings, stronger balance sheets and a more resilient macroeconomic backdrop behind a maturing asset class.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Ongoing costs and charges will impact returns. Past performance does not predict future returns, losses may be made. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
