Top of the Morning: Emerging Markets - Performance drivers and risks
The desk believes that emerging market assets are staging a significant recovery after a prolonged period of underperformance, backed by favorable economic conditions and renewed investor interest. Per the full note , emerging market stocks have demonstrated impressive returns in 2025, outpacing the S&P 500 by 20 percentage points, with 35% versus 15% returns respectively. This trend is driven by broader economic growth, productivity gains from AI technologies, and a shift away from concentrated performance in a few sectors. As we observe this renewed enthusiasm towards emerging markets, our internal data indicates a supportive backdrop, with firm views increasingly aligning towards these markets as viable investment options.
What the desk is arguing
The desk's central thesis posits that the long bear market for emerging markets may have finally turned a corner. Recent performance data shows emerging market stocks have returned 35% year-to-date, significantly surpassing the S&P 500's 15% gain, a shift likely to attract further investment interest going forward.
Supporting this view, the commentary highlights a favorable global economic environment that supports earnings growth both in the U.S. and internationally. As Alejo Czerwonko of UBS notes, productivity improvements driven by AI are expected to benefit a broader range of countries and industries, which is essential for the overall performance of emerging markets.
Where it sits in our coverage
Our internal consensus target for emerging market assets places them at 1.075, with a range from a minimum of 1.04 to a maximum of 1.12. Key firms supporting this outlook include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns closely with jpmorgan, which holds a slightly more aggressive stance at the upper end of our consensus range, while bofa presents a more conservative view of the outlook.
How other firms see it
Several firms are on board with this optimistic outlook for emerging markets, especially those aligned with rising performance trends. For instance, jpmorgan and ubs are bullish on potential returns driven by broadening economic growth across emerging markets. In contrast, bofa remains skeptical, reflecting caution around external factors impeding these assets' performance.
Key currency pairs to monitor include USD/BRL and USD/INR, particularly given their sensitivity to changes in these market dynamics, notably influenced by the Fed's monetary policy direction.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Emerging markets have significantly outperformed developed markets year-to-date.
- 02AI-driven productivity gains could broaden the performance spectrum across emerging economies.
- 03The recent surge in interest may signal a renewed confidence from global investors.
- 04Alignment among leading firms suggests a consensus bullish outlook on emerging markets.
Market implications
Traders should monitor the emerging market equities' performance relative to the S&P 500 as additional data solidifies the recovery narrative. Specifically, keeping an eye on fluctuations in the USD/BRL and USD/INR currency pairs will provide insight into broader market sentiment and investor positioning.
Risks to this view
A reversal in this bullish sentiment could be prompted by macroeconomic headwinds such as a stronger dollar or negative shifts in global economic indicators. Additionally, geopolitical tensions or deteriorating domestic conditions within key emerging markets could undermine investor confidence.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we are going to continue with our ongoing series of conversations as it relates to the emerging markets.
With that, joining me today in our new studio space in Midtown Manhattan at 1285. I'm glad to welcome back Alejo Zerwanko, the Chief Investment Officer for Emerging Markets Americas with the UBS Chief Investment Office. I believe, Alejo, our first conversation in the new year, so a belated Happy New Year to you.
Great to have you back, and as always, looking forward to hearing your insights. Thank you so much for having me. What a treat, this space.
I'm excited to be here. Absolutely. So for the purposes of our conversation today, Alejo, I know we typically focus on the Investing in Emerging Markets Monthly Report, though for today, you want to focus on the Weekly Regional View for Emerging Markets.
So let's dive into what's been going on within the asset class. Has the long winter, Alejo, in emerging markets ended? It's been long indeed, depending on how you measure it.
Emerging market assets have underperformed for over a decade, but we think that is likely over. Look at recent data. In 2025, EM stocks delivered 35% returns in U.S. dollar terms.
Compare that with the S&P 500's 15%. So far this year, 18% up for emerging market stocks, 2% up for the S&P, so pretty sizable outperformance. This has led to renewed interest by global investors in emerging markets, and we think this is likely to continue in part because of what we've been calling the great broadening of performance, meaning we think the hyper-concentrated performance in hyperscalers or chip companies is unlikely to continue.
Broader sets of countries and industries can benefit because number one, the global economy is doing well, and this is helping earnings growth, not only in the U.S., but outside of the U.S. Number two, AI is leading to productivity gains in a broad set of countries and industries. And number three, geopolitics is changing the game.
People want to have exposure to a broad range of geographies. For all these reasons, then, we rate emerging market equities and emerging market bonds as attractive in our strategies. So let's dive into performance drivers a bit, maybe beginning with some of the external drivers supporting emerging markets in the current environment.
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.