Grant Webster

Conflict-related commodity market disruption is just the latest in a series of shocks testing policymakers and unsettling investors. Yet a familiar pattern is playing out in markets.

Grant Webster, Co-Head of EM Sovereign & FX: “Historically, EMs have borne the brunt of supply shocks, but in recent years resilience has become a more common theme. From the post-COVID energy/inflation shock to last year’s trade tariffs and now war in Iran, the initial EM sell-off has been brief and EM outperformance has ensued. At the same time, developed markets have faced rising yields and higher volatility, blurring^[1] the traditional distinction between EM and DM risk. Behind this lies relative strengthening in EM, with prudent fiscal policy, healthier current accounts and proactive central banks all boosting resilience. Investors and rating agencies are increasingly recognising these improvements, with the current EM upgrade cycle among the strongest seen in recent decades. Given this relative policy strength and higher real yields, we believe that EMs are better placed to withstand inflation headwinds.”

Looking ahead, the key question is whether renewed supply shocks could trigger another inflationary episode similar to 2022, when inflation peaked at around 8% in EM^[2] and 7% in DM.

Webster continued: “There will be winners and losers, but the backdrop is very different to 2022 when inflation forecasts had already risen sharply before Russia invaded Ukraine. Since February, EM inflation expectations have only increased by c.50bps and while a further rise is likely, high real rates across EM give central banks a lot more room to manoeuvre than their DM counterparts.”

That resilience is also visible at the corporate level, where many EM companies are used to operating with higher rates and inflation than their developed market peers.

Alan Siow, Co-Head of EM Corporate Debt: “Coupled with the strength of activity data we see across much of the EM universe, that means that EM economies should be better placed to deal with inflationary pressures arising from the supply shock vis-à-vis their DM counterparts.”

Broader lessons from the Middle East

The market reaction to war in Iran is also informative through a more regional lens. While Middle Eastern markets initially came under pressure, the reaction proved short-lived. Credit spreads have already fallen back to pre-war levels, credit ratings have been largely unscathed and bond issuance is continuing and receiving strong investor demand.

Victoria Harling, CIO – Middle East and Co-Head of EM Corporate Debt: “The resilience we’ve seen in Middle Eastern markets reflects a macroeconomic transformation: many economies have worked hard to reduce their reliance on oil exports and that’s really paying off.”

The region is also benefiting from efforts to position itself as a strategic commercial and financial hub in an increasingly multipolar world^[3]. Drawing parallels with the City of London in the early 2000s, Alan Siow “Authorities have made it abundantly clear that the region is open for business, and the number of global companies establishing a presence there is rising. At the same time, the region’s bond markets are becoming bigger, broader and deeper.”

Alongside economic reform, the region is also undergoing rapid social and cultural change. Archie Hart, Emerging Markets Equity Portfolio Manager: “From the vibrant social scene in an increasingly multicultural Saudi Arabia to plans for the region’s first casino in the UAE, the Middle East is changing and fast. Coupled with a raft of favourable characteristics – from time zone to connectivity – this is one of the most exciting regions for investors today.”

Energy market dynamics – a structural growth story for EM investors

While the oil price shock is a global challenge, energy market dynamics are also providing a rich EM-centric opportunity set for investors. Rising energy demand is coinciding with constrained and disrupted supply. Crucially, this is coinciding with a clean tech sector transformation. Solar modules, batteries and electric vehicles (EVs) have become the cheapest options available for EM economic and sustainable development, as China’s ambitious manufacturing and deployment rollout has pushed prices down at extraordinary speed.

Matt Christ, Emerging Market Transition Debt Portfolio Manager: “These improved economics have expanded the commercial opportunity set in EM and many of the associated investment opportunities reside in the private credit world. We’ve made deals across the energy value chain – wind power generation in the Philippines, energy transmission lines in Brazil, a renewable data centre provider in Latin America, and Egypt’s first sustainable aviation fuel production facility.”

Private deals in emerging markets also offer investors a favourable risk/return profile^[4], which contrasts with a loosening of underwriting standards in the US. Alper Kilic, Head of Alternative Credit: “Across EM, we’re seeing investment opportunities that tick multiple boxes for investors: exposure to structural growth themes, attractive yields and strong deal protections – on loans to fundamentally strong borrowers.”

AI – a disruptor and enabler

The examples above help explain how the EM private credit opportunity set is inherently heavy-asset, low-obsolescence (HALO).

Kilic noted: “These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models that are increasingly prevalent in the US private credit market and appear most exposed to risks from AI disruption.”

In EM equities, too, there are compelling comparisons to be made with the US around AI.

The AI boom increasingly depends on hardware. A small group of EM firms sit at the physical limits of that infrastructure; the “Secret Seven”^[5] may represent one of the most overlooked opportunities in global equities today.

“Against a backdrop of a global shortage of chips, AI-driven memory demand is creating an enduring tailwind for South Korea’s Samsung Electronics. SK hynix is another Korean firm benefiting from the memory upcycle underpinning AI infrastructure spend. Elsewhere, a number of companies are well-placed in the context of Taiwan’s AI-export complex and data centre supply chain demand. Some of these businesses trade at multiples that are just a fraction of the lofty valuations seen in the US today,” said Hart.

Meanwhile, CATL is an example of a listed Chinese company with a true global edge: its EV Qilin battery supports a 1,000 km driving range on a single charge. The pace of AI development in the physical economy in China is also accelerating rapidly, including advances in autonomous humanoid robotics, as evidenced by a robot breaking the human half-marathon record.

Hart: “There are increasing parallels with the dotcom bubble, when EM equity valuations remained relatively low while parts of the US stock market overheated. The years that followed saw strong EM outperformance after the bubble burst. Today, we see similar dynamics emerging, making this the most compelling entry point for EM equities I’ve seen in 25 years.”

Reasons to recalibrate investment views

From a more structural perspective, even as resilience strengthens the risk profile of EM assets, an enduring premium remains.  Siow: “While the EM corporate credit universe is highly diverse and it’s vital to take a selective investment approach, the overall compensation for risk is generous. Across the EM universe, country-specific concerns often overshadow a company’s underlying fundamental strength, pushing yields above those offered by DM bonds of a similar credit quality.”

This phenomenon extends to the private market space.

“In the EM private credit world, the reason for the favourable risk/return profile is an enduring barrier to entry. The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding,” said Kilic.

Taking a wider lens, with Hungarian 10-year government bond yields now within around 75bps of their UK equivalents, there is a strengthening case for taking a more holistic view of global investment allocations.

Jaspal Boparai, Co-Head of UK Institutional: “With supply shocks becoming the new norm, traditional asset class behaviour shifting and old EM/DM distinctions breaking down, investors must rethink how they build resilience and diversification in their portfolios while positioning themselves for a transforming world.”

———

Notes:
[1] https://ninetyone.com/en/insights/reframing-fixed-income-the-old-rules-are-no-longer-fixed
[2] Ninety One estimates exclude India (incomplete data set), Turkey (extreme values).
[3] https://ninetyone.com/en/insights/the-end-of-easy-globalisation
[4] https://ninetyone.com/en/insights/private-debt-hidden-strengths-in-emerging-markets
[5] https://ninetyone.com/en/insights/the-secret-seven-undervalued-firms-at-the-heart-of-ai-infrastructure

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Archie Hart

Emerging market equities enter 2026 with a compelling combination of improving fundamentals, greater policy visibility and deep structural growth drivers. Despite geopolitical noise and macro uncertainty in 2025, the asset class delivered robust performance, supported by pragmatic policymaking, resilient domestic demand and valuations that continue to stand in stark contrast to stretched levels in parts of the developed world. With diversification already beginning to broaden global market leadership, emerging markets are increasingly positioned to benefit from shifts in global capital allocation.

The macro backdrop also appears increasingly constructive. The current US-dollar cycle has extended far beyond its historical average and now shows signs of reaching maturity, with rate differentials, capital flows and policy dynamics beginning to look similar to previous turning points. Historically, such conditions have tended to favour non-US assets, particularly emerging markets, where valuation starting points are far more attractive.  This combination of cyclical support and improving structural foundations gives EM a stronger starting point than in previous years.

Strong foundations and clearer policy signals support momentum

Emerging markets demonstrated notable resilience last year, with performance comfortably ahead of developed markets. A series of macro shocks failed to unsettle the asset class, largely because investors were able to look through short-term disruption and focus on stronger underlying fundamentals.

Archie Hart, Co-Portfolio Manager, Emerging Markets Equity: “2025 was a strong year for emerging markets, which outperformed their developed counterparts comfortably,” adding that despite tariff noise and regional tensions, “markets looked through near-term disruptions.”  Policymaking across major emerging economies continues to be anchored by stability, transparency and long-term economic competitiveness. China’s renewed emphasis on the private sector, India’s unprecedented scale of infrastructure investment and the Middle East’s acceleration of economic diversification are reshaping growth dynamics across the developing world.

Structural advantages support long-term performance potential

A combination of higher real rates, conservative policy stances and ongoing reform momentum continues to underpin confidence in the asset class. Regions such as the UAE and broader Middle East stand out as structural winners, supported by economic diversification and growing integration with Asia. In South America, improving policy credibility and falling rates are paving the way for renewed domestic and foreign investment.

Hart said: “Emerging markets are benefiting from a powerful combination of reform momentum, policy clarity and increasingly resilient domestic growth. From infrastructure investment in India and economic diversification in the Middle East to improving governance and capital market reform elsewhere, these structural shifts are broadening the opportunity set and strengthening the foundations for long-term growth.”

Beyond technology, reforms across multiple regions, from fiscal consolidation and financial-system strengthening to targeted industrial strategies and deepening trade links, are laying the groundwork for more durable structural growth. These shifts are expanding the opportunity set by improving macro stability, enhancing competitiveness and supporting greater long-term investment.

AI leadership emerges as a critical engine of growth

A significant driver of optimism for 2026 is the scale and depth of emerging markets’ involvement in the global AI value chain. While the conversation is often dominated by US mega-caps, several Asian and emerging market companies have become indispensable to AI hardware, infrastructure and power-intensive ecosystems.

Juliana Hansveden, Portfolio Manager, EM Leaders: “Select companies in Asia and other emerging markets have quietly become indispensable players in the global AI value chain,” supported by established leadership, strong moats and durable competitive advantages.

The performance of the so-called “Secret Seven” – key technology and semiconductor firms across Taiwan, China and South Korea – reflects this shift, with several matching or surpassing the achievements of their US counterparts over the past year.  These companies sit at the centre of the world’s most advanced technology manufacturing cluster, benefiting from deep engineering expertise, tightly integrated supplier networks and some of the highest R&D investment levels globally. They provide the critical bottleneck components, from leading-edge logic and high-bandwidth memory to advanced packaging, switching and datacentre power systems, that determine the pace at which global AI capacity can scale.

At the same time, the traditional defensibility of software is being eroded as AI lowers barriers to entry, increasing the importance of upstream hardware ecosystems where EM companies hold structural leadership.

Market conditions set the stage for broader global allocation shifts

As global investors navigate stretched valuations in developed markets, particularly in US AI-related equities, emerging markets stand to benefit from even modest reallocation flows. The asset class remains relatively discounted while offering broader economic exposure and a more diversified earnings base.

Varun Laijawalla, Co-Portfolio Manager, Emerging Markets Equity: “It is important to note the parallels with earlier market cycles. AI is going to be incredible for the next 25 years, but that does not necessarily make this a good time to buy developed market AI-related securities that already look overstretched.” Even a small shift in global asset allocation — such as 5% moving out of US equities — could translate into a meaningful inflow for emerging markets.”

There is historical precedent for such a shift: after the peak of the dot-com cycle, emerging markets went on to outperform developed markets materially over the subsequent decade as global leadership broadened and capital rotated toward undervalued regions.  Today’s backdrop of stretched DM valuations, concentrated leadership and a potentially moderating US dollar shares several characteristics with that earlier transition.

Navigating risks while securing long-term advantage

While emerging markets remain attractively valued on a relative basis, risks such as renewed tariff uncertainty or short-term volatility linked to US market corrections could create temporary disruptions. However, the structural economic base, diverse earnings profiles and lower starting valuations give emerging markets greater potential to rebound swiftly relative to more concentrated developed markets.

Hart stated: “US policy in South America has also gained attention following recent actions in Venezuela, but this does not change the generally positive view on the broader emerging market asset class. Arguably, if the US erects a security umbrella over the Western Hemisphere and acts to install or maintain western and market-friendly regimes, this could be positive for South American markets.”  While there has been some speculation that a stronger security focus on South America may lead to a weaker focus on other geographies, the status quo in areas such as the South China Sea or Taiwan is unlikely to change in the medium term, with deterring conflict remaining a US priority.

“Pockets tied too closely to a single narrative could face disappointment if growth assumptions cool,” but the broader asset class retains significant resilience. Emerging markets are positioned for stronger recovery potential because “valuations start from a lower level” and the underlying real economy is “far broader based than in the US,” Laijawalla cautioned.”

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Given the boom in AI, companies must invest in bigger, better, faster data in their IT systems to keep up.

With 2023 falling short of expectations in terms of a recovery for emerging markets, Archie Hart and Varun Laijawalla, Co-Portfolio Managers, Emerging Markets Equities at Ninety One, are optimistic on a 1- or 2-year view, now that the building blocks for a turnaround are beginning to fall in place.

Outwardly emerging markets equity returns appear to have disappointed again in 2023, with the benchmark EM index up only 10% in an otherwise strong year for global equity markets. But a deeper analysis reveals much to be positive about. For example, 19 out of 24 emerging markets registered positive US$ returns in 2023. Of the top 8 markets (88% of the universe), 7 registered positive returns, with 6 of the 7 seeing strongly positive double-digit returns. Eastern European equities were up 47%, Latin American equities by 33% and Asian equities by 8%. So why the seemingly weak headline performance of EM? That is entirely due to a rather large bear in the China shop driving returns in that market for the year down -11%. EM ex-China performed robustly up +20% for the year. If a bull was ever to chase the bear out of the China shop, returns could be very strong for the asset class.

A disparate range of countries, at different points in their economic cycles and with widely differing policy environments, emerging markets are an early-cycle asset class and tend to perform strongly as the world recovers from a recession.  Rates in emerging markets have been higher for longer, meaning there are more levers to pull as and when we find ourselves back in a period of monetary loosening. Furthermore, interest rates have normalised between developed and emerging markets, meaning developed markets have lost their low cost of capital tailwind, with the playing field now looking a lot more even. We are close to peak negativity on China, be it politically, economically or corporately.

Finally, one of the big things that drives our asset class is the US dollar. If rates are close to peaking in the US, that removes a big tailwind to the US dollar. If we think the dollar has peaked, that is a positive environment for emerging markets. This makes for an exciting stock-picking opportunity looking forward in our view. In particular, with economic growth likely to be slow and/or slowing in 2024, we believe markets are likely to reward companies that can “win” in this environment and punish “losers” ferociously.

Therefore, we can see the potential for returns to be driven much more by the companies that have been most resilient or have adapted best to this turbulence.  However, there are also likely to be many companies which have yet to wake up to the changes the volatile macro situation has wrought in their businesses. In other words, we are hopeful this will be a year where the market focuses on winning and losing companies, creating a much friendlier environment for stockpickers.

Opportunities within and outside of China

The great thing about the Chinese market is how deep and diverse it is. There are 4,000 listed companies across a wide range of different industries and those industries have sub-cycles in them. We are excited by the energy transition, where China is a leading player, the shift to consumer premiumisation, and travel, where currently, flights from the US to China are still only at 10% capacity relative to pre-Covid volumes.

Looking elsewhere, and this is true of the asset class more broadly, if one country or industry is troubled, there is normally another country or industry doing very well indeed, and that is the case now. While China is obviously going through a tough patch, but we don’t believe it is structurally challenged.

Outside of China, Latin America has had extremely elevated interest rates for some time, and inflation appears under control, meaning when interest rates come down again, that will be positive for those markets. The Middle East is experiencing a capex boom as countries invest the oil windfall into transitioning their economies into a post-oil environment. Additionally, places like Mexico, Thailand, Malaysia and Indonesia are benefiting from supply chains relocating out of China.

If we look industry-wide, technology has been a tough place to be over the last year because we have been working through an inventory glut post-Covid. Given the boom in AI, companies must invest in bigger, better, faster data in their IT systems to keep up. We think there is a great longer-term resource story.

Therefore, we look at a world that we believe is rich in opportunity for our investment process, where the emerging market opportunity has not been so out of favour for 20+ years. This could be a rich period for both market alpha and beta in the emerging world. It is also worth noting that 2024 will profile one of the great positives in our world today – elections involving 4 billion people globally, many of them in emerging markets. We are convinced that Churchill was right, and that democracy is the worst way to run the world apart from all the other ways….thus elections are both a wonderful thing to behold but also a rich source of risk for an investor. Consequently, careful management of risk will also be essential in 2024; that 2024 may bring surprises should not be surprising given the lessons of this decade so far.

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Archie Hart

A recent visit to India confirmed that the country is in a good place; the economy is strong, concrete is being poured and sentiment is generally upbeat. As we all know, this is not news. However, after 30 company meetings, where themes often recur, what interested Emerging Markets Equity Portfolio Manager, Archie Hart, was something else. It occurred to him that India might be following China’s exponential growth trajectory. He explains why.

Emerging countries often find themselves in periods of good economic growth. In a micro-corporate sense, animal spirits rise, companies invest, and growth surges. But at some point, capital begins to be misallocated, returns begin to fall, and companies find themselves in tougher times with balance sheets that are more leveraged than they appeared to be at the peak of the cycle. In a macroeconomic sense, the cycle exhibits buoyant growth gradually leading to higher and eventually unsustainable fiscal and current account deficits, which the markets eventually baulk at financing, leading to an inevitable (and sometimes severe) retrenchment. Thus, at any point in time, we believe the really important issue is not the rate of growth, but the sustainability of that growth.

The ‘pie conversation’ is ubiquitous, in both emerging and developed countries. The conversation always revolves around whether the focus of government should be on ‘growing the pie’ or on ‘how the pie is divided’. One side of the argument is that the focus should be on growth, even at the expense of its deleterious side effects (inequality and the effect on the environment to name a couple) as this will see the biggest benefit for all. The other side is that the focus should be on a more equitable division of the pie, given all the iniquitous side effects of capitalism.

In our view, both sides make good points and both matter. But for emerging countries, the focus should squarely be on growing the pie, as it is currently too small to satisfy everybody, however it is divided. The only way of meeting a poor society’s needs is through making the pie bigger, not by parsing the division of the pie. If we compare China and India, for most of the past 40 years, China has tended to focus on growing the pie. However, in recent years, China’s policy has appeared to pivot to how the pie is sliced, with a significant regulatory intervention in the economy to address some of the imbalances that arose during the years of strong growth. India has emerged under the administration of Narendra Modi, who has been prime minister since May 2014, as an increasingly focused ‘pie-grower’.

India has successfully been on a mission to build its soft infrastructure. An instrumental part of this has been the introduction of the Aadhaar identification system, which has legitimised 1.4 billion citizens. Subsequent endeavours have included:

• the rapid increase in smartphone penetration
• increasing financial inclusion through the Unified Payments Interface
• bolstering economic growth through a regulated real estate sector
• economic resolutions via a reformed Insolvency and Bankruptcy Code
• streamlining indirect taxes through a national goods and services tax
• privatising the banking industry, and
• growing the private equity industry.

India is also developing an ability to deliver ‘hard’ infrastructure projects as well. Highway construction which averaged 28km per day in 2019/20, is targeted to reach 45km per day in 2023/24. The government is also addressing the historic inefficiency of India’s railways. A key project here is the Dedicated Freight Corridor (DFC) which is an ambitious attempt to create new freight rail capacity in the heart of India. In addition, city metros and India’s first high-speed passenger railway are being built. This marks a break from the past where India struggled to execute its infrastructure plans.

The myriad of ways in which India has built both soft and hard infrastructure to underpin and improve the sustainability of the growth that it is achieving in the past decade have been impressive. In other words, the key point about growth in India is not its quantum, but its new visibility and sustainability. There is also a new determination and ruthlessness in pursuing growth. India almost feels like the China of the 1980s and 1990s. Deng Xiaoping, the architect of China’s great policy pivot to prioritising economic growth, once said, “It doesn’t matter whether a cat is black or white, as long as it catches mice”.

It appears to us that India’s cat is finally catching real mice.

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