Emerging Markets: The New Frontier of Real Returns

Mauro Ratto, Co-Founder and Co-Chief Investment Officer at Plenisfer Investments SGR

After more than a decade of underperformance versus developed markets, in 2025 emerging markets delivered some of the strongest global performances, with gains exceeding 30%^[1]. Equity indices doubled the return of the S&P 500, and fixed income—both in local currencies and in USD—also generated significant returns1.

It was, in many ways, an atypical performance: while a weak dollar generally supports emerging markets—given their high share of USD-denominated debt—the new US tariffs should have been a headwind. Yet these economies showed a surprising degree of adaptability in a global environment far from favourable, marred by widespread geopolitical tensions and a weak global economic cycle.

What drove emerging markets’ resilience?

Emerging markets remain a highly diverse and heterogeneous universe, but most countries share a common trait: the pursuit, for several years, of fiscal and monetary orthodoxy. While the West is grappling with record public debt and widening deficits, many EM countries today boast sound budget discipline, monetary policies that have remained restrictive, and contained inflation.

Another crucial element is the reductionin external vulnerabilities, evident in the recent dynamics of sovereign issuance. In 2025, global USD issuance fell by roughly 19% (January–May), while local currency issuance reached a five-year high of around USD 326 billion^[2]. This shift reflects a funding pattern that is increasingly domestic, reducing currency mismatches and dependence on external markets. It is a structural transition that will contribute to a declining role of the US dollar in global finance, reinforcing its medium- to long-term weakening trend.

This macro backdrop is the foundation of today’s EM resilience, but another factor—one increasingly important yet still underestimated—has also helped offset the impact of tariffs: their growing macroeconomic independence, driven by the structural transformation of global trade.

Asia: the new engine of global growth

Asia is the area where this transformation is most profound. For the first time since these markets became investable—over three decades ago—the investment cycle is predominantly local. “South-to-South” trade, fuelled by intra-regional flows among China, ASEAN and India, has reached a critical mass capable of absorbing tariffs without major disruptions. The recent revival of economic interactions between India and China—where economic pragmatism has temporarily outweighed geopolitics—further confirms this trend.

China remains the epicentre of this shift. Despite a lacklustre economic cycle, it has benefited from the theme that has driven performance in the West: Artificial Intelligence. The combination of long-term industrial planning and access to low-cost energy is an extraordinary competitive advantage that China can leverage in the race for AI leadership, given the sector’s rapidly growing energy needs. And in a market environment where concentration risk in US indices remains elevated, the Chinese tech sector could provide a useful hedge—particularly if the country narrows the AI gap. At the same time, China remains a key source of risk. Structural headwinds—including weak consumption, excess industrial capacity and an ongoing adjustment in the real estate sector—require more decisive policy responses. Moreover, corporate debt remains very high: without a rebound in earnings and revenues, deleveraging capacity is limited, transferring part of the risk onto the banking system—an area that requires close monitoring.

Across the broader Asian region, several countries stand out for favourable demographics, macro stability, and orthodox economic policies. Therefore, these countries have strong structural growth potential. Among them is Indonesia, increasingly critical for key commodities, where the focus is shifting from raw extraction to higher value-added processing. The country is also seeing fast growth in manufacturing and agribusiness. Malaysia is climbing up the technology value chain, with a growing role in the E&E (electrical & electronics) sector and is emerging as a preferred hub for data centres in Asia thanks to significantly lower energy costs relative to its peers. Vietnam remains a global manufacturing hub and is now showing rapidly accelerating economic growth and investment trends. 

Outside Southeast Asia, attention remains on India, where we expect growth to continue at an annual rate between 5% and 7% over the next decade. After a long rally that pushed valuations to elevated levels, Indian markets delivered more muted returns in 2025 (around 5%)^[3], trailing the broader Asian region. In our view, this pause is a physiological step in a long-term growth trajectory, and the normalisation in valuations could offer an attractive entry point in the short to medium term.

Latin America: selective opportunities, structural value

Latin America also delivered strong returns: corporate credit markets provided some of the year’s best opportunities, and among the strongest performers—regionally and globally—were Brazil and Mexico.

Brazil benefits from significant untapped potential linked to its vast commodity reserves. Valuations remain attractive despite the ongoing rally. Both Brazil and Mexico have also delivered strong fixed income returns, driven by currency appreciation and the rate-cutting cycle. Despite relatively sticky inflation in Brazil (around 5% versus Mexico’s more contained levels), local real rates remain between 7% and 8%³. However, the increasing popularity of Brazil and Mexico has turned them into widely held positions, with rising concentration risks. In fixed income, we are therefore also looking at Peru and Colombia, which offer solid fundamentals, albeit with political risks.

Some situations remain complex, such as Argentina. The unexpected mid-term election victory of La Libertad Avanza gives President Milei the mandate to continue the painful restructuring process begun two years ago, but the window of time—roughly two years—remains narrow. The probability of default or a new restructuring has now fallen sharply, and if stability continues to improve, we may see new sovereign issuance. Selective opportunities have emerged in both sovereign and corporate credit, particularly among companies with solid fundamentals in strategic sectors that for years paid spreads aligned with the country’s risk. Today, however, markets—especially corporate bonds—appear to already price in a benign scenario.

Finally, EM fixed income still offers attractive credit spreads in Frontier Markets—such as Egypt or Nigeria—and in select corporate special situations that allow investors to add idiosyncratic risk to portfolios.

Valuations, carry and the global cycle: what lies ahead?

Despite structural improvements, emerging markets remain partially linked to the economic cycle of developed economies and cannot yet be considered an autonomous engine of global markets. True decoupling has not yet occurred. But the growth gap—currently around 2 percentage points[4]—is set to widen; not because EMs will accelerate materially, but because developed economies face structural headwinds from record debt burdens. If EMs maintain macroeconomic orthodoxy, today’s valuation backdrop—particularly in equities—combined with higher growth should allow these markets to outperform the rest of the world over the coming decade, with Asia at the centre of this transformation.

In fixed income, with spreads already compressed, most future returns are likely to come from carry and duration. China remains the key driver for EM performance, in a context where US monetary policy is expected to stay accommodative, with consensus forecasting rates at around 3% by the end of 2026 and likely remaining low for an extended period. In this environment, carry remains attractive in local-currency bonds issued by the most disciplined countries. Equities, with still attractive valuations, should be the real beneficiary of this conjuncture.

Conclusion

At Plenisfer, we view emerging markets not only as a source of return potential but also as an opportunity for diversification and protection in the event of a correction in developed markets, which today face significant concentration risk in the US tech sector. Such risk also exists within EM indices—where the top six companies belong to the tech sector and account for over a quarter of the index—but diversification remains substantial: investors gain exposure both to Chinese companies that directly compete with US big tech, and to companies operating in key nodes of the AI value chain (such as chipmakers or producers of critical components like high-bandwidth memory). Moreover, the opportunity set extends well beyond this theme—especially in India, ASEAN and, selectively, Latin America.

The heterogeneity of EMs is still broad, making rigorous bottom-up selection essential. But today emerging markets are no longer merely a tactical trade: they are a core component of diversified, global portfolios able to capture the real growth of the coming decade.

^[1] Source: Bloomberg

^[2] Source: Reuters

^[3] Source: Bloomberg

^[4] Source: Bloomberg

Disclaimer

This analysis relates to Plenisfer Investments SGR S.p.A. ("Full Investments") and is not a marketing communication relating to a Fund, investment product or investment services in your country. This document does not constitute an offer or invitation to sell or buy any securities or any business or undertaking described herein and does not form the basis of any contract.

Any opinions or forecasts provided are current as of the specified date, may change without notice, do not predict future results, and do not constitute a recommendation or offer of any investment product or service. Past performance does not predict future returns. There can be no guarantee that an investment target will be achieved or that there will be a return on capital. This analysis is aimed exclusively at professional investors in Italy within the meaning of the Markets in Financial Instruments Directive 2014/65/EU (MiFID). It is not intended for retail investors or U.S. Persons, as defined in Regulation S of the United States Securities Act of 1933, as amended.

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