Top of the Morning: The evolution of Emerging Markets
The desk sees a significant shift in the performance dynamics of emerging markets, which have notably outperformed the S&P 500 over the past 18 months, driven by strong rallies in key regions like North Asia and Latin America. Per the full note from UBS’ Alejo Czerwonko, markets such as Korea and Taiwan have seen gains of 70% and 50% respectively, reflecting broader macroeconomic improvements and robust commodity prices. Additionally, this rising trend spotlights the evolving nature of the asset class influenced by technological advancements in sectors such as AI and semiconductors. As investors increasingly recognize these shifts, it could set the stage for a more considerable reallocation towards emerging market assets.
What the desk is arguing
The desk believes that the recent outperformance of emerging markets presents a compelling investment narrative. The data presented by UBS highlights extraordinary gains, particularly in North Asia, where Korea and Taiwan have surged significantly, advising traders to consider the underlying macroeconomic improvements driving these trends.
Emerging markets overall delivered returns that have outpaced the S&P 500, reflecting a potential shift in perception as bolstered by improving political climates, strong commodity prices, and enticing valuations in regions such as Latin America. Figures such as Brazil and Mexico seeing gains exceeding 70% in dollar terms over 18 months exemplify this trend and suggest sustained momentum.
Where it sits in our coverage
Our consensus target for emerging market currencies aligns at 1.075, with a range between 1.04 and 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Current positioning indicates that our view is at the higher end of the spectrum, suggesting an optimistic outlook compared to bofa’s more cautious approach.
How other firms see it
Firms like jpmorgan support the desk’s bullish outlook on emerging markets, while bofa offers a contrarian stance, arguing for more conservative positioning based on global economic uncertainties. This divergence highlights potential volatility in this asset class.
Watch the performance of dollar-denominated emerging market assets and consider the impact of recent advancements in technology sectors like AI and semiconductors as indicators of the potential for further outperformance in the coming quarters.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Emerging markets have substantially outperformed the S&P 500 over the last 18 months, driven by gains in North Asia and Latin America.
- 02Korea and Taiwan posted gains of 70% and 50%, respectively, due to favorable macroeconomic conditions and higher commodity prices.
- 03Technological advancements are reshaping the emerging markets asset class, drawing increased investor attention.
- 04The current target range for emerging market currencies is positioned between 1.04 and 1.12, with consensus leaning towards the upper end.
Market implications
Traders should monitor the performance of key currencies within emerging markets, particularly as they react to broader tech sector developments and commodity price shifts. Specific attention should be given around the 1.075 level as a potential pivot point for further movements.
Risks to this view
The primary risk to this bullish call would include a sudden shift in global economic sentiment or a downturn in commodity prices, which could retract the gains exhibited by emerging market assets. Additionally, geopolitical tensions could disrupt market conditions.
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 revisit the emerging markets. I am coming to you today from our 1285 podcast studio in New York with Alejo Zirwanko, the Chief Investment Officer for Emerging Markets Americas from the UBS Chief Investment Office. Alejo is joining us because today on Wednesday, July 22nd, his team authored the latest iteration of the ongoing Investing in Emerging Markets publication series, the title, The Evolution of Emerging Markets.
So with that, Alejo, before we get into it, great to have you back at the table. Thank you for dropping by. Thank you for having me.
In person is always better. Absolutely. Agree with that.
So Alejo, to set the stage a bit, if you look at emerging markets performance, have quietly outperformed the S&P 500 for about 18 months. So quite noteworthy. What is driving this turnaround from your vantage point?
And why do you think many investors have not fully acknowledged this performance? Let's start with the basics. Emerging markets delivered pretty solid returns in the last 18 months.
Actually, we're talking about twice the performance of the S&P 500, both in 2025, full year, and so far into 2026. What's behind this, Dan? I think you got a point to North Asia.
You got to start there because Korea, Taiwan, these are markets that are up 70% and 50% respectively in U.S. dollar terms this year alone. Incredible performance. Now emerging markets are something that's more complex than just a couple countries.
If you consider Latin America, a region that has also delivered remarkable returns as of late. Brazil, Mexico, Colombia, Peru, Chile have each risen over 70% in dollar terms over the last 18 months. These markets have been supported by higher commodity prices, overall improving macro fundamentals, evolving political dynamics, attractive valuations, a range of drivers behind this outperformance.
So to sum it up, Dan, in many aspects, you're talking about an emerging market universe today that is driven by both technology and commodities. Alejo, as I went through the piece, what really stood out to me is that a handful of semiconductor companies in Taiwan and South Korea now carry more weight than several major emerging market countries combined, quite staggering. How would you say has the rise of AI and semiconductors changed the nature of the emerging markets asset class?
It's been absolutely wild. If you think about it, the performance of Korea and Taiwan has been so dramatic that it is single-handedly reshaping the asset class entirely. Think about this, just three companies, all of them chip makers, now carry more weight in the emerging markets equity universe than the combined equity market weight of India, Brazil, Mexico, South Africa, Saudi Arabia, and the UAE together.
So three companies, six not that small kind of countries. What's more, Taiwan and Korea have each overtaken China as the largest market in the MSCI Emerging Markets Index, and now together they account for almost half the emerging markets universe. It's not just about the composition of the index, Dan, it's importantly also about volatility.
These are countries that have moved around quite a bit in recent weeks. These movements have been turbocharged by the widespread adoption of leveraged ETFs by retail investors, particularly in Korea, and so more volatile Korea, more volatile Taiwan mean more volatile emerging markets. So it's overall changing the face of investing in emerging markets.
Alejo, I have to believe now the success you laid out, quite eye-opening, though I think there might be a new debate out there around concentration as a result. Now with Taiwan and Korea now representing such a large share of the index, should investors be worried that markets have gotten ahead of themselves, or do the fundamentals still justify their leadership? Not an easy question to address.
I think there's concentration risks across many major regions and markets. It's a debate we've had in the U.S. quite actively. It's ongoing.
To bottom line it, in the context of emerging markets, we think Taiwan and Korea deserve a place in portfolios, in global portfolios. They are simply irreplaceable when it comes to the AI value chain. These countries have spent decades building know-how, talent, an ecosystem around chip-making, and competitors today do not get even close.
They are at the cutting edge and it's built over decades. Shrinking that may happen, but it will take a lot of time. Despite market dynamics over the last four to eight weeks, semiconductor stocks have fallen sharply very recently.
We think that a structural glut in microchips globally is very unlikely. People are still demanding this like there's no tomorrow. The world's largest tech companies are locked in a winner-take-all race to develop AI capabilities.
Governments are increasingly investing in what's called sovereign AI. This is infrastructure to secure technological independence. Listeners who are interested in these topics, our CIO for the Americas, Ricky Hoffman, has a great signal over noise, a recent podcast explaining why we think the demand for chips will likely continue to outstrip the supply for chips.
Let me emphasize, Korea and Taiwan, we think you've got to hold this exposure in portfolios, even after their run-up in prices and the recent volatility. At the same time, we've got to remember Warren Buffett, wise words, be greedy when others are fearful, be fearful when others are greedy. Strong fundamentals in Korea and Taiwan, but extraordinary gains always need to warrant some degree of caution.
So we wouldn't abandon these markets, but at the same time, we wouldn't be chasing aggressively. And that signal over noise episode, you mentioned the latest one from Eureka, why the semiconductor pullback does not mean an AI glut was released just two days ago on UBS on Air Market Moves, the channel you're listening to right now. So thank you for that plug, Alejo.
Before we close out, given the fundamentals, given the outperformance, from a positioning standpoint, what are you recommending to investors right now? Yeah, we think, look, emerging markets need to play a role in global portfolios. We've been saying this for a long time.
Performance in the last 18 months support this analysis. But you've got to go beyond Korea and Taiwan, include them, but broaden the aperture in a way. Why?
Emerging market macro dynamics are strong. Manufacturing activity is healthy. Commodity prices are fairly elevated.
Earnings growth are solid across emerging market regions. And quite interestingly, Dan, despite strong performance in the last 18 months, valuations in emerging markets have actually come down. The 12 month forward PE ratio for the MSCI EM index is now 10x, 10 times.
It used to be 13 times not long ago, at the start of the year. So in addition to places like Korea, in addition to maintaining exposure to places like Taiwan, we see value in China, we see value in India, two underperformers so far this year. And we also believe Latin America remains an important source of diversification through exposure to physical assets and sectors outside of technology.
If we take a step back, Dan, beyond just emerging markets, we are pounding the table on our transformational innovation opportunities, the trios. We're referring to artificial intelligence, power and resources, and longevity. Emerging markets exposure is baked into these ideas as well.
Alejo, always a pleasure. Very helpful touch base, keeping our listeners, our clients informed on CIOs thinking when it comes to emerging markets. And helpful is always to have the positioning guidance.
So a great catching up with you, Alejo. Thank you for dropping by today. Great to be here.
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