“The Composite Risk Premium in the U.S.—Equities, Sovereign Debt, and Credit—is the Lowest Since 2000 and Points to Below-Average Returns in the Coming Years. Moreover, We Expect Mid-Cap Domestic Companies and Value-Oriented Stocks in Europe to Outperform the MSCI World Index, Along With Certain Growth Companies in the U.S. and, Above All, Emerging Markets,” Says Luca Paolini, Chief Strategist at Pictet AM.
In Paolini’s view, over the medium term, there are additional arguments in favor of emerging markets beyond benefiting from their secular growth and attractive valuations. “They Should Benefit From a Weaker Dollar, a Trend Toward Lower Real Interest Rates, and Higher Commodity Prices. Uncertainty About Global Trade Agreements Encourages Greater Investment and Flows Between These Economies,” he adds.
Furthermore, as is the case in other regions, the chief strategist believes that many emerging market companies are well positioned to take advantage of the expansion of artificial intelligence. “Emerging Asia Is at the Forefront of the Technological Revolution With a Growing Group of Companies Playing an Indispensable Role in the Global AI Supply Chain (Such as Advanced Semiconductor Manufacturers) and Others That May Challenge U.S. Leaders Due to Scalability and Monetization (Such as China’s Hyperscalers). India Relies Less on Foreign Investment Flows, Which Should Lead to Lower Volatility, as Its Domestic Investors Hold 18.5% of the Equity Market—the Highest Figure in Over Two Decades,” comments Paolini.
Tariffs and Supply Chains
According to Martin Schulz, Director of the International Equity Group at Federated Hermes, we are witnessing regional spheres of influence strengthen as geopolitical relations evolve, which encourages investors to pay closer attention to opportunities in emerging markets.
“Instead of Globalization, We Are Now Seeing Regionalization and Groupings Around Centers of Power, Alliances, Monetary Blocs, and Shared Interests. Global Trade Will Continue, but Likely on a Smaller Scale. However, Not Everything Is Changing. We Are Not Facing a Repeat of the Cold War, Where Trade Flows Across the Iron Curtain Were Virtually Nonexistent. For Now, China and the United States Have Put Their Rivalry on Hold: China Needs to Address a Weak Economy Mired in Deflation, and the Trump Administration Needs to Focus on Domestic Politics. I Don’t See Apple or Tesla Leaving China. Supply Chains Are Becoming More Local Than Before. We’re Also Seeing Chinese Companies Produce for the Local Market in Europe and Potentially Even in the United States,” says Schulz, explaining their view of the global landscape.
He also notes that in 2026, numerous elections will be held around the world, especially in South America. According to his analysis, this may alter expectations and increase short-term uncertainty but could lead to greater long-term stability. “In China, the Trade War With the United States Has Been Resolved for Now, Giving the Country the Opportunity to Focus on Economic Stimulus While Implementing Its Next Five-Year Plan. As Manufacturing Continues to Move Out of China Due to Costs and Trade Restrictions, This Should Benefit Many Other Asian Economies. Finally, We Believe That the Global Monetary Easing Cycle Will Support Emerging Markets Overall,” he argues.
A New Frontier for Real Yields
This macro context is complemented by a key data point: after more than a decade of underperformance compared to developed markets, emerging markets recorded some of the best performances globally in 2025, with gains exceeding 30%. In fact, equity indexes doubled the return of the S&P 500, and fixed income—both in local currencies and in U.S. dollars (USD)—also generated significant returns. For Mauro Ratto, Co-Founder and CIO at Plenisfer Investments (Part of Generali Investments), this is the strongest argument in favor of including emerging assets in portfolios.
“In Many Ways, This Was Atypical Behavior: While a Weak Dollar Typically Favors Emerging Markets—Given Their High Proportion of Dollar-Denominated Debt—New U.S. Tariffs Should Have Been an Obstacle. However, These Economies Showed a Surprising Degree of Adaptability in an Unfavorable Global Environment Marked by Widespread Geopolitical Tensions and a Weak Global Economic Cycle,” acknowledges Ratto.
According to the expert, emerging markets remain a highly diverse and heterogeneous universe, but most countries share a common trait: the pursuit, over several years, of fiscal and monetary orthodoxy. “While the West Grapples With Record Levels of Public Debt and Growing Deficits, Many Emerging Countries Today Exhibit Strong Budget Discipline, Monetary Policies That Have Remained Restrictive, and Contained Inflation,” he highlights.
For the asset manager, emerging markets not only represent a potential source of return but also an opportunity for diversification and protection in the event of a correction in developed markets, which today face a significant concentration risk in the U.S. technology sector. “This Risk Also Exists Within Emerging Market Indexes—Where the Top Six Companies Belong to the Technology Sector and Account for More Than a Quarter of the Index—but Diversification Remains Substantial: Investors Gain Exposure Both to Chinese Companies Competing Directly With Major U.S. Tech Firms and to Companies Operating in Key Nodes of the AI Value Chain, Such as Chip Manufacturers or Producers of Critical Components Like High-Bandwidth Memory. Furthermore, the Opportunity Set Extends Well Beyond This Theme—Especially in India, ASEAN, and Selectively in Latin America,” concludes Ratto.
