Emerging markets (EMs) are enjoying a resurgence, and the story is compelling. Growth prospects are improving thanks to easing inflation, structural reforms, and stronger institutions, with the IMF projecting 4.1% growth this year. Unlike the past, this growth is less credit-fuelled and more investment-led, supported by orthodox policies like inflation targeting and fiscal rules. The EM-DM growth gap is widening again, historically a positive signal for EM debt performance.
Fixed income investors have plenty to cheer about too. Yields are historically high, and even with tighter spreads, EM debt offers attractive relative value. Central banks acted early to tame inflation, pushing inflation-adjusted interest rates into positive territory, while fiscal consolidation and stronger external positions have reinforced stability. High interest rates alone can absorb moderate spread widening, but countries have also smoothed amortisation profiles, making the outlook for EM debt robust.
Currency dynamics add another tailwind. The Federal Reserve’s rate cuts and a weakening dollar historically favour EM assets, easing debt burdens and boosting exports. This trend, combined with high carry and improving risk sentiment, makes EM currencies appealing. Meanwhile, local borrowing is gaining traction as EMs deepen domestic markets and reduce reliance on hard currency debt, creating resilience against global shocks.
Equities are also in the spotlight. EM stocks have rallied for nine straight months, driven by strong earnings, AI optimism, and foreign inflows. Tech-heavy markets like South Korea and Taiwan are benefiting from AI-driven demand, while fintech and ecommerce continue to disrupt traditional models in underbanked regions. Add to this the global nature of AI infrastructure—with Asia serving as a dominant semiconductor manufacturing hub—and it’s clear EMs are positioned at the heart of transformative trends. In short, EMs offer a rare mix of growth, yield, and structural opportunity that investors can’t afford to ignore.
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