These asset classes are back on the map

Figure 1: The true size of countries vs the Mercator Projection

Source: Johan van den Hoogen, ETH.

Investors navigate with a distorted map of their own.

As at 31 August 2026, the United States accounted for around 63% of the MSCI All Country World Index. Taiwan, the largest emerging market in that index, represented around 3%.

That does not make the index wrong on its own. But market weight is not the same as economic importance or investment opportunity. And when many other markets, sectors and companies are left at the edge of investors’ portfolios, they risk leaving out countries that have strengthened their financial systems, built important companies and become more resilient than many give them credit for.

The scars are healing

Australian investors have had plenty of reasons to be wary of emerging markets. From the Latin American debt crisis of the early 1980s to Russia’s 1998 rouble devaluation, investors saw how currency pressure, capital flight and sovereign stress could combine to cause severe damage to economies and markets.

But years of policy reform, including tighter fiscal discipline, more credible monetary policy, stronger banking regulation and deeper domestic capital markets, have begun to challenge that belief. As the chart below shows, emerging market equities returned 91% over the three years to 31 August 2026, compared with 73% from developed markets. When you consider this period includes “Liberation Day” and the Iran conflict, events that would be expected to have a disproportionate adverse impact on emerging markets, the result highlights equity markets’ confidence in the companies in these markets and their economies.

Chart 1: MSCI EM Index vs MSCI World Index, last 36 months

Source: Bloomberg, as at 9 September 2026. Indices shown are the MSCI World Net Total Return Index (NDDUWI) and MSCI Emerging Markets Net Total Return Index (M1EF), in US dollars. Past performance is not indicative of future performance.

Over the same period, hard-currency and local-currency emerging-market bond indices each outperformed global bonds¹. More strikingly, local-currency bonds achieved this with lower volatility than developed-market sovereign bonds for most of the past three years, as the chart below shows. Again, this captures “Liberation Day” and the Iran conflict. Unpredictably, “Liberation Day” was more volatile for developed market bonds. The impact of military action in Iran, was initially felt in emerging markets, but their volatility has since reduced and are now below developed markets. Bond investors remain wary of the government debt many developed markets are accruing and the impact of unconventional policies.

For investors, this broadens the search for income and resilience beyond the developed market sovereign bonds long treated as the natural home of safety.

Chart 2: Emerging market bonds vs developed market bonds, 90-day total return volatility (%)

Source: Bloomberg, as at 9 September 2026. 90-day rolling volatility of daily total returns, annualised. Indices shown are the I20344US Index (EM local-currency government bonds) and the Bloomberg Global Aggregate Total Return Index Value Unhedged USD (LEGATRUU), in US dollars.

The hard lessons paid off

This has been more than a change in market sentiment. Many emerging economies have spent the years since their earlier crises trying to make sure the same weaknesses could not bring them undone again.

In the latter half of the 20th century, governments and corporations often borrowed in US dollars because domestic savings pools were shallow and few investors trusted local institutions. When local currencies fell, the cost of servicing that debt rose, driving more foreign capital out.

One notable example is the 1997 Asian Financial crisis, which began after Thailand ran out of foreign money to defend its fixed exchange rate and had to float the baht. The float led to a crash in many regional currencies and a deep recession in the affected economies.

But rather than wallow in their problems, the experience changed how many of these countries manage their finances. Governments reduced their dependence on foreign-currency debt and built deeper local bond markets, making them less reliant on overseas investors. Central banks adopted inflation targets, accumulated foreign-exchange reserves and became quicker to confront rising prices; most notably in 2021 when several Latin American central banks raised interest rates before the US Federal Reserve did.

Those stronger foundations have since been tested by geopolitical uncertainty, steep rate rises and renewed trade conflict. Many of the larger emerging economies have proved more resilient than in earlier cycles, with capital outflows, sovereign spread widening and the inflationary impact of currency falls more contained.

Debt levels help explain why. The International Monetary Fund expects government debt across advanced economies (ex-US) to reach 94.4% of GDP in 2026, compared with 58.5% for emerging markets ex-China. Including the US, as shown in the chart below, pushes that expectation higher. Progress has not been uniform, but the broad numbers no longer support the assumption that fiscal discipline belongs to the developed world.

Chart 3: General government gross debt, % of GDP

Source: International Monetary Fund. Figures from 2026 are IMF projections. The EM aggregate includes China, whose trajectory accounts for a substantial share of the post-2020 increase.

Why this matters for investors

Australian investors have often treated emerging markets as the risk they can avoid. In practice, leaving them out can mean leaning harder on familiar risks and ending up less diversified than they realise.

A portfolio of Australian shares, US shares and developed market bonds can still leave investors exposed to many of the same economic and policy pressures. It may contain thousands of securities while remaining dependent on a relatively narrow group of developed market cycles.

Emerging markets can bring in sources of return that are harder to find at home. Their bonds provide access to countries at different stages of the inflation and interest-rate cycle. Their share markets include companies benefiting from rising domestic demand, investment in infrastructure and the reconfiguration of global supply chains.

What this means for bonds

For years, developed market government bonds were treated as the natural source of safety and emerging market bonds as the risky alternative. That distinction has become less reliable.

High government debt can constrain monetary policy because raising interest rates also raises the government’s borrowing costs. At an extreme, the central bank’s pursuit of price stability becomes entangled with the government’s financing needs. This is known as fiscal dominance.

We have been arguing about this phenomenon for years, arguing that developed economies now generate many of the fiscal risks that were once generated by emerging economies.

Australian investors who confine their fixed income exposure to domestic and developed-market bonds may remain exposed to these pressures.

Emerging market bonds can add a different source of income, but the label covers borrowers with little in common.

A local-currency bond issued by Mexico is driven by Mexican inflation, interest rates and the peso. In contrast, US-dollar debt issued by a lower-rated government is more sensitive to American rates, the dollar and the borrower’s ability to access foreign capital. Where inflation is easing and policy credibility remains intact, central banks may have room to cut rates, which can lift the price of existing bonds.

Rather than managing both, investors can access the VanEck Emerging Income Opportunities Active ETF (EBND). EBND had outperformed its benchmark by 2.58% p.a. since its February 2020 inception. And in turn has outperformed both Australian and Global bond developed market indices.

Table 1: EBND Trailing returns

Source: Bloomberg, VanEck. Inception date for EBND is 11 February 2020 and a copy of the factsheet is here

Benchmark is 50% J.P. Morgan Emerging Market Bond Index Global Diversified Hedged AUD and 50% J.P. Morgan Government Bond Emerging Market Index Global Diversified. Australian Bond Index is Bloomberg Aus Bond Composite 0+ Years. Global Bond Index is Bloomberg Global Aggregate Index Hedged into AUD. The table above shows past performance of the Fund from its Inception Date. Results are calculated to the last business day of the month and assume immediate reinvestment of distributions. Fund results are net of management fees and costs, but before brokerage fees or bid/ask spreads incurred when investors buy/sell on the ASX. Returns for periods longer than one year are annualised. Past performance is not indicative of future performance.

What this means for equities

The change in emerging-market equities is easier to see because many of the companies behind it are part of the AI story.

The old picture of an emerging-market company was a miner, oil producer or state-owned bank. Today, information technology accounts for more than 41% of the MSCI Emerging Markets Index.

Companies such as TSMC and Samsung now occupy vital positions in the AI supply chain. Many leading processors and AI models are designed in the US, but much of the advanced manufacturing, memory and other hardware on which they depend comes from Asia.

Investors are no longer being asked to buy rapid economic growth and hope company profits catch up. Stronger profits and forecast earnings growth now support parts of the emerging-market investment case. The two charts below show that earnings growth is expected to compare well with developed markets while valuations remain lower.

Chart 4 and 5: EM vs DM - EPS growth outlook & valuations

Source: Bloomberg, as at 9 September 2026. Indices shown are the MSCI World Net Total Return Index (NDDUWI) and MSCI Emerging Markets Net Total Return Index (M1EF), in US dollars.

In China, the largest emerging market, first-half net profit growth among A-share companies was the strongest since 2022, while profits across the technology-focused STAR Market rose more than fourfold.

The opportunity extends beyond technology. India’s strong economic growth has been accompanied by record growth in lending to mid-sized businesses, a positive signal for earnings breadth. Resource producers across Latin America and South Africa offer exposure to different commodity and earnings cycles.

The emerging markets label therefore requires nuance. Macro factors still matter, but their effects depend on where and what an investor owns. Those differences give investors several potential sources of earnings growth rather than one emerging-market trade.

For a multi-factor approach to emerging-market equities, consider the VanEck MSCI Multifactor Emerging Markets Equity ETF (EMKT). As at 31 August 2026, EMKT had outperformed the broad MSCI Emerging Markets Index over one, three and five years and since its inception in April 2018 and compares favourably to developed market indices.

Table 2: EMKT Performance as at 31 August 2026

Source: VanEck, Morningstar Direct

EMKT inception date is 10 April 2018 and a copy of the factsheet is here.
Australian equities is S&P/ASX 200 Index. Global equities is MSCI World ex Australia Index. The table above shows past performance of the Fund from its Inception Date. Results are calculated to the last business day of the month and assume immediate reinvestment of distributions. Fund results are net of management fees and costs, but before brokerage fees or bid/ask spreads incurred when investors buy/sell on the ASX. Returns for periods longer than one year are annualised. Past performance is not indicative of current or future performance which may be lower or higher.

Overlooked opportunities

The Equal Earth projection does not make Africa larger. It shows what the old map concealed. The economies, companies and bond markets in emerging economies have changed. Portfolios built around the old version may now be carrying a different risk: overlooking where the opportunity has moved.

Key risks

Investments in EMKT and EBND carry risks associated with ASX trading time differences, emerging markets, market and currency movements, concentration, liquidity and fund operations. EMKT also carries company, sector, political, regulatory, tax and index-tracking risks; EBND carries interest rate, default, hedging, credit-rating and fund-manager risks. See each fund’s PDS and TMD for details.

EMKT is likely to be appropriate for a consumer who is seeking capital growth, is intending to use the product as a core, minor or satellite allocation within a portfolio, has an investment timeframe of at least 5 years, and has a high risk/return profile

EBND is likely to be appropriate for a consumer who is seeking capital growth and a regular income distribution, is intending to use the product as a minor or satellite allocation within a portfolio, has an investment timeframe of at least 5 years, and has a very high risk/return profile.

1 - as measured by the Hard Currency J.P. Morgan Emerging Market Bond Index Global Diversified Index, the Local Currency J.P. Morgan Government Bond Emerging Market Index Global Diversified and the global bond Index as the Bloomberg Global Aggregate Index Hedged into AUD