Top of the Morning: Are emerging markets becoming less volatile than developed markets?
The desk's thesis focuses on the shifting perception of emerging markets (EM) regarding volatility, suggesting that these markets are becoming less risky compared to developed markets (DM). Per the full note , emerging market assets have surprisingly outperformed their developed counterparts in 2023 even amid escalating geopolitical tensions, defying long-held investment assumptions. This evolving narrative is bolstered by the performance metrics that indicate positive total returns for emerging market assets since the onset of the conflict in the Middle East. With increasing investor interest in EM equities, bonds, and currencies, market expectations may need to recalibrate as volatility readings are increasingly signaling stability in these regions.
What the desk is arguing
The desk frames this as a pivotal moment for EM investments, shifting the narrative away from traditional views of EMs as high-risk, high-volatility assets. The commentary emphasizes that despite a tumultuous global backdrop, assets from emerging markets have shown resilience and even growth, prompting a reassessment of their risk profiles.
Supporting this assertion, emerging market equities and currencies have recorded notable outperformance, delivering positive returns that stand in stark contrast to the expectations connected with DM performance. This trend calls into question the established paradigms around EM volatility and may encourage traders to rethink their portfolios to capture the potential gains.
Where it sits in our coverage
Our current consensus target for the emerging market currency index is 1.075, with a range spanning from 1.04 to 1.12. Notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns closely with jpmorgan, which suggests relative firmness in emerging markets, while it diverges from bofa, indicating a more cautious outlook. As current estimates reflect a slight upward tilt, this places our desk's view at the higher end of the expected range.
How other firms see it
Firms such as jpmorgan and citigroup exhibit alignment with the desk’s analysis, noting the recent resilience of EM assets. In contrast, bofa takes a more cautious stance, highlighting potential setbacks.
As the narrative develops, key indicators such as emerging market currency variations relative to global risk sentiment and interest rate differentials will be critical to watch. The pressure on developed currencies could provide a clearer signal of EM robustness.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Emerging markets are showing resilience amid global turmoil.
- 02Positive returns from EM assets challenge traditional risk assessments.
- 03Investors should reconsider portfolio allocations to include emerging equities and currencies.
- 04The volatility narrative around emerging markets is evolving.
Market implications
Market participants should watch levels around the consensus target of 1.075 for potential support or resistance, while closely tracking emerging market capital flows as signposts for further strength or corrections.
Risks to this view
A reversal of this outlook may occur should geopolitical tensions escalate further, leading to significant capital outflows from emerging markets. Additionally, any signs of economic deterioration in key EM countries could reintroduce volatility perceptions that undermine current trends.
Hi, everyone, and welcome back to Top of the Morning on the UBS Market Moves podcast channel. This is Brian Contreras, and joining me in the studio today to talk about his new investing in emerging markets report titled In the Face of Volatility. Glad to welcome back Alejo Charwanko, the Chief Investment Officer for the Emerging Market Americas in the UBS Chief Investment Office.
Thank you for dropping by and spending some time today with our listeners and clients here on Top of the Morning. Thank you for having me, Brian. So happy to be here.
Awesome. To get the conversation started, for decades now, emerging markets has been seen as the riskier part of portfolios, but we're now seeing that evolve. What's changed and why are markets suddenly challenging that assumption now?
Yeah, I would say we're living through pretty extraordinary times, and many of our most deeply held assumptions in investing are being challenged. Think about this. Even as the conflict in the Middle East intensified, the International Energy Agency is talking about the biggest energy crisis in history.
Emerging market assets, this is stocks, bonds, and currencies, have outperformed developed market counterparts so far this year, and in addition, they have delivered positive total returns since the war began. So things are changing. You would not probably have expected an outcome like this, and I think it's simply one reminder of how you got to prepare portfolios for a broad range of scenarios, for a world that might look very different from the world we're used to living in the face of twin geopolitical and technological revolutions.
Absolutely. So when people think about volatility, they often focus on equities, but your work shows a broader story across currencies and bonds as well. Which asset class best illustrates how much the old EM versus DM narrative is breaking down?
I think the currency story is particularly interesting, Brian. Since the start of 2025, we're going almost at 18 months now, volatility in emerging market currencies has trended lower, and on average, sits below that of G7, that is the main developed market currencies. A weaker U.S. dollar has helped this trend, but I think it also has to do with improved monetary policy frameworks in emerging markets.
When inflation spiked a few years ago, right after COVID, we saw emerging market central banks reacting earlier, more aggressively than developed market central banks, and in this way, these markets are solidifying their inflation-fighting credentials. There's the institutional quality credentials. So I think this is notable, that today, emerging market currencies on aggregate, doesn't apply to every single one of them, but on aggregate, are less volatile than G7 currencies.
Sources & References
How we cover this story
Related news on this pair
Bank Stocks Are Having a Tough Time. This Analyst Is Betting on 2 Names.
European banks beat forecasts with third-quarter profit
Stronger eurozone bank earnings reduce recession risks and support EUR carry positioning, though lack directional guidance on rate expectations.
AI stocks haven't played by the normal valuation rules. Now that rates are higher, they may have to, says UBS
UBS caution on AI valuation sustainability in higher-rate regime pressures mega-cap tech, reducing carry appeal of USD-denominated growth assets.