Improving corporate earnings, resilient economic growth and greater policy flexibility are strengthening the investment case for emerging market (EM) assets across equities, corporate debt, sovereign bonds and currencies.
Ahead of the second-quarter earnings season, companies across the MSCI Emerging Markets Index are benefiting from stronger earnings momentum, with South Korea leading earnings upgrades thanks to its exposure to memory chips and AI-related supply chains.
Portfolio managers at Ninety One say the improving backdrop reflects broadening earnings growth, easing inflation and stronger economic fundamentals.
Varun Laijawalla, co-portfolio manager for emerging markets equity, said the outlook for EM equities is increasingly being supported by stronger fundamentals rather than investor sentiment.
“Emerging market equities are finally being validated by fundamentals rather than simply benefiting from investor optimism. We believe this is a genuine inflection point for emerging market equities,” he said.
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Laijawalla added that earnings growth is broadening beyond technology, with Latin America and the Europe, Middle East and Africa (EMEA) region benefiting from stronger commodity markets and improving domestic fundamentals.
Lower inflation and relatively high real interest rates are also creating a more supportive environment for active investors.
He noted that today’s emerging market equity universe looks very different from a decade ago, with technology and advanced manufacturing companies now accounting for around 40% of the index.
The improving backdrop also extends to fixed income and foreign exchange markets.
Thys Louw, portfolio manager for emerging market sovereign debt and foreign exchange, said many emerging economies are entering this phase with lower inflation, stronger policy credibility and healthier external balances than in previous cycles.
“Emerging markets today are fundamentally more resilient than in previous cycles,” he said, adding that attractive real yields and greater monetary policy flexibility provide further support for sovereign bonds and currencies.
Within corporate debt, Alan Siow, co-head of emerging market corporate debt, said stronger company balance sheets and more conservative financing structures have improved issuers’ resilience despite recent market volatility.
He said increasing differentiation between issuers is creating opportunities for active managers to identify companies with robust fundamentals while avoiding those facing refinancing pressures or policy uncertainty.
While geopolitical tensions and changes in US monetary policy remain key risks, the managers believe improving earnings, resilient economies and stronger corporate and sovereign fundamentals are making the case for emerging market assets increasingly compelling.
“The bull case is no longer driven primarily by valuations or shifts in the US dollar, but by increasingly robust underlying fundamentals,” they said.