For much of the past decade emerging markets (EMs) have been largely an afterthought in global portfolios. Slower growth in China, falling commodity prices and repeated external shocks eroded the optimism that once surrounded them.
However, the ground has shifted and momentum is now propelling EM securities back into focus. The gap between developed markets (DMs) and EMs — in terms of stability, fiscal discipline and policy credibility — has narrowed, and in some respects even reversed. As a result, investors are turning bullish on the asset class once again.
This is not because EMs have suddenly become risk free. Instead some of the traditional strengths of DMs have weakened, while several EMs have taken meaningful steps to strengthen their fundamentals. The result is a more balanced risk-reward assessment, and in certain cases more compelling opportunities in EMs than in their richer counterparts.
A useful way to understand this change is through the Overton Window, the range of policies considered acceptable in political discourse at any given time. In economic policymaking this window in DMs used to be narrow and firmly anchored. Central bank independence, institutional stability and predictable fiscal management were considered non-negotiable. Two decades ago interference with these principles would have been viewed as a serious breach of credibility and likely punished by markets.
Recent years have shown that the window has shifted. Political leaders in some of the largest DMs have intervened in areas once considered off-limits — including the dismissal of senior statistical officials and significant departures from established fiscal rules — without the severe market consequences once expected. Markets have at best become agnostic to such developments, at worst complacent.
At the same time, the long-standing assumption that DMs are inherently more stable than EMs has weakened. Since 2022 volatility in DM government bond markets has resembled patterns historically associated with EMs. The sharp sell-off in UK gilts during the short-lived Truss administration and the sizeable losses in US treasuries are notable examples. In some respects, DM debt instruments have behaved more like EM assets than the “safe havens” they are assumed to be.
Ritu Vohora, an investment specialist at T Rowe Price, captured this curious dynamic in a May 2025 analysis where she noted that safe havens have been “behaving badly”: offering security one moment, only to betray traditional expectations and correlations the next.
This “EM-ification” of DMs has been building for some time. Structural pressures — from elevated debt burdens to persistent inflation and political polarisation — suggest that higher volatility in DM assets may now be a more permanent fixture. Meanwhile, many EMs have improved in areas that once undermined their credibility. Financial Times noted recently that the EM borrowing premium over US treasuries has fallen to its lowest level since 2007, reflecting lower risk perceptions and a steady narrowing of the credibility gap.
One of the clearest examples is monetary policy. When inflation surged in the aftermath of the coronavirus pandemic, central banks in Brazil, SA, Mexico and elsewhere responded with early and decisive rate hikes. This orthodox approach helped anchor inflation expectations and maintain credibility. By contrast, several major DM central banks initially dismissed inflation as transitory and delayed tightening, which prolonged uncertainty and weakened bond market performance.
Currency dynamics are also shifting in EMs’ favour. The dollar has been in a period of structural strength for more than a decade, supported by both crisis-driven demand and robust US growth. For EMs, this was a persistent headwind: a strong dollar raised the cost of servicing external debt and often triggered capital outflows. Now there are reasons to expect a weaker dollar over the medium term.
Large and rising US fiscal deficits combined with fading American exceptionalism and greater political uncertainty have started to weigh on perceptions of the dollar’s safe-haven status. Slower US growth and mounting political pressure could also prompt the Federal Reserve to ease policy in the coming quarters.
Historically, dollar weakness has been supportive for EM assets, easing funding pressures and improving relative returns, especially when paired with stronger commodity prices, a key benefit for EM exporters. A weak dollar often coincides with EM bull markets, though the strength of this relationship varies across cycles and is also shaped by local dynamics.
As UK-based economist Mark Bohlnd notes, the expectation of such a shift is already feeding through: projections of a weaker dollar have been the strongest driver of the surge in EM and frontier market local-currency debt, marking a sharp reversal of the “strong dollar” paradigm that dominated during the 2024 US election.
Valuations further strengthen the case. After years of underperformance, EM equities and bonds generally trade at discounts to their DM peers, despite stronger growth prospects in many cases. Investor positioning in EM assets remains light, which means even moderate improvements in sentiment could trigger meaningful inflows.
Gold has also emerged as a more trustworthy safe haven. Several EM central banks have increased their reserves, while EM currencies have strengthened, partly due to dollar weakness but also because of improving balance-of-payments positions and foreign exchange reserves.
“The long-standing assumption that developed markets are inherently more stable than emerging markets has weakened. Since 2022, volatility in DM government bond markets has resembled patterns historically associated with EMs — with UK gilts and US treasuries behaving less like safe havens and more like risk assets.”
The Ghanaian cedi, rand and Zambian kwacha are among those that have benefited, helping to attract renewed inflows into local markets. Reform agendas have played a role as well. Nigeria’s recent return to more orthodox monetary policy has drawn portfolio investment back into the country since President Bola Tinubu took office.
Beyond cyclical factors, structural trends continue to favour EMs over the long term. Many have younger populations and expanding workforces, in contrast to the ageing demographics of most DMs. Urbanisation, rising incomes and expanding middle classes are likely to sustain domestic demand growth.
Global supply chains are also being redrawn. Geopolitical tensions and pandemic-era lessons are driving investment towards EM manufacturing hubs in Asia, Africa, Eastern Europe and Latin America. At the same time, while countries like the UK and Germany grapple with deindustrialisation, parts of the EM world are industrialising at pace. In technology adoption, too, EMs are leapfrogging legacy infrastructure, particularly in financial services and digital commerce.
None of this eliminates the risks inherent in EM investing. Political uncertainty, governance challenges and commodity price swings remain real concerns. The difference is that investors are now better compensated for taking these risks. In contrast, some DMs carry similar levels of political and policy uncertainty without offering the higher returns traditionally associated with EMs.
The re-rating of EMs does not signify a sudden transformation in their fortunes, nor does it dismiss the challenges they face. However, it reflects the reality that the old distinctions — “DM equals stability, EM equals volatility” — no longer hold as firmly as they once did. In an environment where some of the strongest arguments for DM safety have weakened, the relative appeal of EMs has improved.
For asset allocators, the implication is that EM exposure should no longer be treated solely as a tactical, high-beta component of a portfolio. The combination of improved policy credibility in several large EMs, attractive valuations, potential currency tailwinds and stronger long-term growth prospects makes the strategic case more compelling.
If the prevailing perception of EMs remains anchored in outdated assumptions, the opportunity is clear: the market is mispricing the balance of risks and rewards, and global investors who are underweight EMs risk missing out. Taken together, this confluence of factors may quietly be making EMs great again.
• Gopaldas is a director at Signal Risk and a fellow at the Gordon Institute of Business Science.
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