When Western markets are volatile, how do emerging markets forwards perform?

The global investment landscape is shifting, and uncertainty is at an all-time high. Unless you’ve been living under a rock, you know that in early 2025, U.S. President Donald Trump announced 25% tariffs on imports from Canada and Mexico and 10% tariffs on Chinese goods. If Trump imposes tariffs on the EU, Europe’s economic powerhouses—especially Germany and the Netherlands—could face severe disruptions, threatening growth, trade stability, and supply chains across the continent.

​

For investors, the implications are clear: developed markets face growing uncertainty, with trade tensions, Federal Reserve policy unpredictability, and rising geopolitical risks creating a highly volatile environment. The U.S. Treasury yield curve remains deeply inverted, a historic recession indicator, while Europe continues to grapple with stagnation and weak economic growth.

​

In contrast, emerging markets are demonstrating resilience and opportunity. Far from outdated narratives of fragility, many emerging economies have strengthened fiscal policies, maintained robust growth, and now present superior valuations relative to their developed counterparts. Central banks in Brazil, Mexico, and Indonesia took early action to combat inflation, while India and Vietnam continue to see GDP growth that outpaces the West. Institutional investors are taking notice.

​

Despite stronger earnings potential, emerging market sovereign investments offer yields that make developed market debt increasingly unattractive. Major players—including BlackRock, Bridgewater Associates, and Goldman Sachs—have adjusted their portfolios accordingly.

​

The Changing Global Economic Playbook

 

For decades, developed economies dictated global capital flows. Now, recent turbulence is forcing investors to rethink their allocations. The U.S. Federal Reserve’s aggressive rate hikes, persistent inflation, and clear signs of economic fatigue have contributed to erratic equity performance and one of the deepest yield curve inversions since 1981—historically a strong recession indicator. And, there's more:

​

• The CBOE Volatility Index (VIX) has fluctuated dramatically, spiking from 10.62 to 65.73 in the past year, reflecting heightened sensitivity to geopolitical and economic shocks.
   

• The U.S. Treasury yield curve inversion (2-year vs. 10-year yields) remains the most extreme since 1981—an event that has preceded every U.S. recession in modern history.
   

• Germany’s GDP contracted by 0.1% in 2023, reflecting broader economic stagnation in Europe. Meanwhile, the Eurozone is projected to grow at just 1.2% in 2025, highlighting sluggish recovery.

 

As traditional safe havens become increasingly unpredictable, investors are rediscovering emerging markets as a source of stability and growth.

 

The Case for Emerging Markets: Undervalued and Misunderstood

 

The outdated stereotype of emerging markets as inherently volatile no longer holds. In fact, many of these economies are displaying greater fiscal discipline and macroeconomic stability than their Western peers.

 

Stronger Macro Fundamentals

 

• Early Inflation Control: While the Fed and ECB were slow to act, emerging market central banks moved early. Brazil, Mexico, and Indonesia raised interest rates aggressively in 2021, helping them contain inflation sooner than developed markets.
   

• Higher Growth Rates: The IMF forecasts emerging markets to grow at 4.1% in 2024, far outpacing the 1.5% growth projection for advanced economies.
   

• Currency Resilience: The Indian Rupee and Brazilian Real have remained more stable than in past crises, supported by stronger foreign exchange reserves and sound fiscal policies.

 

Emerging markets are gaining traction among institutional investors as risk premiums decline and confidence strengthens. Tightening sovereign investment spreads indicate reduced perceived risk, while historically low implied volatility on emerging market investment reflects growing stability. This shift signals a maturing market environment that investors are beginning to embrace.

​

At the same time, emerging market assets remain undervalued relative to their fundamentals, creating a rare buying opportunity. With sovereign debt yields ranging from 6–15%—far surpassing the ~4% offered by U.S. Treasuries—emerging market fixed income presents an attractive alternative for yield-seeking investors. Countries with strong fiscal positions, such as Indonesia, have seen sovereign risk premiums fall, further reinforcing the case for increased emerging market exposure.

 

What the Heavyweights Are Saying

 

• BlackRock’s 2024 Outlook:
  "We have maintained a broad preference for emerging market (EM) assets over DMs."
   

• Ray Dalio, Bridgewater Associates:
  "Emerging markets, especially those with commodity and technology tailwinds, are positioned for a decade of outperformance."
   

• Goldman Sachs Asset Management 2024:
  "The EM bond market remains a favourable, and yet underappreciated, area of the fixed income universe. It currently provides a yield of over 7%, which is an attractive source of income for an asset class that is high quality."

 

A growing institutional consensus suggests emerging markets are not just a contrarian play—they are becoming a necessity for diversified portfolios.

 

How Institutions and Investors are Capitalizing on the Trend

 

For investors looking to capitalize on these trends, a structured approach is essential. Currency hedging through EM sovereign investments with forward contracts can help mitigate volatility while taking advantage of high interest rate differentials. A diversified EM exposure, with sovereign investments comprising 5–15% of portfolios, enhances risk-adjusted returns. Additionally, active management is key, as specialized expertise allows investors to navigate risks and identify opportunities more effectively than passive ETFs.

​

The Bottom Line

 

Emerging markets have been underestimated for too long. With stronger fiscal policies, faster growth, and undervalued assets, they now represent strong opportunities in global finance.

 

The old playbook no longer applies. Sophisticated investors aren’t asking if they should allocate to emerging markets—they’re asking how much they can afford not to.


Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment.