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.
Now this story also applies to bonds, the fixed income space. People might be surprised to hear that emerging market dollar-denominated sovereign investment grade spreads, that is, the risk premium that these bonds pay over U.S. treasuries, has compressed quite a bit, and now is lower than that of U.S. investment grade, as an asset class, right? And volatility in spreads has come down, and is now comparable to that of the developed world.
Finally, Brian, I would say on the equity side, volatility in emerging market stocks has mostly stayed below that of U.S. equities since 2017, even if it remains somewhat high relative to other parts of the developed world. So when you scan the universe of emerging market assets, currencies, bonds, equities, and you look at volatility performance, that is, how much the prices of these assets jump around, it's not as high as you'd think, and it is often lower than developed market counterparts. So you highlight that emerging market central banks moved earlier and more decisively on inflation than developed markets after COVID.
How important has that policy credibility been in reducing volatility, and is it likely to endure? I think this is about – it's a recognition that these countries believe in independent central banks, in what we call economists, the inflation-targeting regime of central banks. They don't question it.
The experiences of very high inflation are too fresh in emerging markets' mind to make the same mistake again, while, as we know, independence of central banking is being questioned in other parts of the world. That's one reality, but it doesn't – it's not just limited to monetary policy, Brian. I would highlight fiscal policy as another area where one should take a fresh look at who is the adult in the room.
We talked about this in prior episodes. Financial dynamics – that is, deficits, debt issues – exist almost everywhere in the world, but I would argue they're more acute in the developed world today than they're in the emerging world today. When you look at debt to GDP and whether this is sustainable in countries like the U.S. or the U.K. or France or Japan, these question marks emerge, while many other emerging markets are having a clearer picture.
There's no perfect performance when it comes to fiscal numbers anywhere, but I would argue the lines between developed and emerging markets when it comes to fiscal accounts are blurring. So Alejo, if emerging markets are no longer the clear high volatility bucket, how should investors think differently about using EM equities, bonds, and currencies in portfolios going forward? First off, Brian, I think many people forgot about the existence of emerging market assets given challenging performance in the years following the global financial crisis up until maybe 18, 24 months ago.
So it's about dusting it off and reassessing whether they play a role in anybody's portfolio. In addition, I would say we do rate emerging market bonds as attractive in our global portfolios. We think the yields available for the asset class are quite interesting, and you should be expecting high single-digit returns over the next year, well above cash.
We also maintain an attractive rating on emerging market equities. This is supported by leadership in AI innovation, higher commodity prices. It's shocking, Brian, as we speak, the size of equity markets in Korea and Taiwan.
It has become larger than that of the UK. Things are changing fast. This has to do with the technological revolution, the relevance of Korea-Taiwan in the technology space.
But then you've got the commodity aspect of emerging markets with countries like Brazil doing quite well in this context. Well thank you, Alejo, for joining me on Top of the Morning today to keep our listeners informed on CIO's thinking on the emerging markets. Thank you.
That was so much fun. We are being prompted to revisit most of our priors, and it's an opportunity to learn and readjust. Incredible.
Again, that was Alejo Charwanko, the Chief Investment Officer for the Emerging Market Americas in the UBS Chief Investment Office. And if you would like to read the latest report released by the Emerging Markets team titled In the Face of Volatility, head on over to ubs.com slash CIO. Thank you again for joining. you the latest research.
UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG, or its affiliate, UBS. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services.
Investment advisory services and brokerage services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements. In the USA, UBS Financial Services, Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at ubs.com forward slash working with us.
For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer. Thank you for watching. If you have any questions or other problems, please post them in the comments section below.
Sources & References
How we cover this story