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 source, 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.
What's top of mind for you, Alejo? As I like to remind my students at Columbia, history shows that whatever happens outside of the emerging markets can be more important than whatever happens inside the emerging world. So the global backdrop matters a lot, and we are living in a soft dollar, easy financial conditions, strong commodity prices world.
This combination of factors is typically quite positive for emerging market assets, equities, and bonds. In addition, we talked about geopolitics. I think every country is taking energy security, food security, technological security, critical minerals, financial security, precious metals, more seriously, right?
We're all thinking about this. And some of the leading producers of food, energy, critical minerals, precious metals sit in the emerging world. Quite a few considerations there when it comes to external drivers.
Domestically speaking, what's top of mind that's supporting the asset class? I think you got to look at emerging markets with a fresh pair of eyes. Nowadays, it is unclear what's an emerging market and what's a developed market if you think about macroeconomic stability or political volatility.
I like to use the example, if you ask JGPT, which country is more fiscally responsible? Is it Peru, Chile, Poland, Malaysia on the one hand, or is it the US, the UK, France, and Japan on the other hand? JGPT very quickly is going to say it's the former, it's the quote-unquote EM.
So the point here being that these countries are being managed from an economic perspective a lot more responsibly. You're seeing upgrades in ratings for country sovereigns. You're seeing low default rates for corporates in the emerging world.
And so the house is in order and maybe getting a little better while I think developments in the developed world, people are concerned about that sustainability, fiscal dynamics, political stability in many countries out there. With all forms of investing comes risk. In this instance, what are some risk considerations our investors, our clients should be mindful of?
I would say, number one, if the environment of soft dollar, easy money, strong commodities changes, this would be a headwind for emerging markets. Let me give you one example. New Fed chair, new information regarding inflation in the US, no longer cuts, instead maybe hike in the US, that would be a policy shift.
Yes, and not good for emerging markets. That's one set of examples. The other thing to recognize is emerging markets have become a combination oversimplifying of commodities and technology.
There's a lot of commodity exposure, there's a lot of technology exposure. If you think about the five, six largest constituents of MSCI Emerging Markets Index, all technology. And they've been doing very well and there's the question of how extrapolatable that is.
So I would say those two are the key risks. But look, Dan, global investors are so under allocated to ex-US assets, emerging market assets in particular, that we think this reallocation has much further room to run. Well, Alejo, thank you for dropping by to spend some time with our listeners, our clients, laying out the investment case considerations for emerging markets.
Anything you want to add before we wrap up? Yes, you mentioned the weekly Emerging Markets editorial. We cover different topics every week.
Last week, China, this week, Brazil and the election cycle. So check it out. There's a lot more detail.
And for our UBS clients listening in, as always, shoot a quick email, give a call to your financial advisor. They will provide you with a copy of the weekly Regional Emerging Markets Report directly or can be located up on ubs.com forward slash CIO. Alejo, thank you again for dropping by.
It was great catching up with you. And I know we're going to continue with these conversations on a monthly basis in 2026. So looking forward to having you back.
Great to be here. Thank you. Definitely.
Again, today, we've been joined by Alejo Zerwanko, the Chief Investment Officer for Emerging Markets Americas with the UBS Chief Investment Office from UBS Studios. I'm Dan Cassidy. Thank you for joining us.
Thank you for tuning in. Be sure to visit ubs.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings, such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending.
UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit ubs.com slash CIO to view 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 working with us.
Please visit our website at ubs.com forward slash CIO dash disclaimer.
Sources & References
How we cover this story