How debt, equity and policy are reshaping emerging markets’ role in global portfolios

Emerging markets (EM) have been in the spotlight throughout 2025. Bond issuance has reached record levels, equity inflows have accelerated, and investors have reassessed the role these economies can play in global portfolios. Structural shifts, from demographics to digital adoption and resource security, have continued to reshape their long-term growth profile, even as familiar risks around politics, commodities, and external shocks remain. This outlook reviews the opportunities and vulnerabilities that have defined the year so far and considers how they may influence the trajectory of emerging markets relative to developed peers.

Fixed Income

According to Reuters, emerging market bonds are experiencing one of their strongest years in recent memory. Issuance surpassed $190 billion in the first half of 2025, the fastest pace in years despite persistent geopolitical uncertainty and elevated global interest rates. The appeal is clear: EM debt continues to offer a compelling yield differential. With many developed-market (DM) government bonds barely yielding above inflation, EM paper provides attractive income for yield-seeking investors.

Importantly, yields are not the only driver. Many EM central banks acted early in the tightening cycle, taming inflation ahead of developed peers and reinforcing policy credibility. Fiscal discipline has improved in several countries, with narrower deficits and rebuilt reserves helping to lower default risk and dampen currency volatility. Together with expectations of U.S. rate cuts, this has created a favorable backdrop for EM borrowers and a green light for investors to re-risk.

Investment grade yield over US Treasuries, 2000 – 2025, daily, bps

Sources: J.P Morgan, Bloomberg

Risk premia have compressed sharply. J.P. Morgan’s EMBI Global index has fallen below 200 basis points, placing EM spreads near DM levels — a rarity historically associated with periods of strong global growth and confidence. Lower spreads reduce borrowing costs, enabling sovereigns and corporates to refinance pandemic-era obligations more cheaply and freeing resources for investment. This tightening also reflects a broader structural re-rating: EM credit is increasingly viewed as mainstream rather than peripheral.

Notably, according to the IMF’s Emerging and Frontier Markets Issuance report, 40% of issuance in 2025 has been in non-USD currencies, signaling diversification and resilience. RMB-denominated “dim sum” bonds are on track for a record year, underscoring Asia’s growing role in funding. While the dollar still dominates, this shift toward local and regional issuance represents a step toward gradual de-dollarization in line with geopolitical realignments.

ETFs

The constructive backdrop extends beyond fixed income. EM equities have attracted record inflows as investors seek innovation and value from these markets. According to the Financial Times, European investment into EM equity ETFs reached €8.1 billion in the first seven months of 2025, already surpassing the whole of 2024.

Source: FT, Morningstar Direct

The MSCI EM Index has delivered a 23% year-to-date return, outperforming both the MSCI World and MSCI USA indices. The largest vehicle in the space, BlackRock’s iShares MSCI EM ETF with more than USD 20 billion in assets, offers exposure across ​​China, Taiwan, India, Brazil and other markets, reflecting global investors’ growing commitment to the asset class.

YTD Returns of MSCI Emerging Markets, MSCI World, and MSCI USA Indices, Jan – Sep 2025, daily (%)

Source: Cbonds

Yet flows are not purely cyclical; they are also shaped by geopolitics. While China still accounts for nearly 30% of major EM ETFs, its slowing domestic demand and trade frictions with the U.S. have pushed some investors to diversify into alternative hubs. Taiwan, with close to 20% of index weight, has gained particular traction thanks to its dominance in the global semiconductor and AI supply chain, while South Korea is also attracting inflows as a key player in memory chips and advanced manufacturing.

Fundamentals and Future Drivers in Equities

Beyond flows, EM equities are supported by fundamentals. The MSCI EM Index is up 23% YTD in USD terms, with valuations that remain highly attractive: forward P/E ratios average 13x, compared with nearly 20x for the MSCI World, based on the MSCI factsheet, which leaves EM equities trading at a 30% discount. This combination of performance and entry-level value has strengthened the case for allocating more global capital to EM strategies.

Cyclical drivers add momentum. A weaker dollar lowers external financing costs, bolsters local currencies, and gives EM central banks scope to ease policy. Brazil, Chile, and several Central and Eastern European economies have already cut rates ahead of the Fed and ECB. Commodity exporters benefit from resilient demand for energy, metals, and agriculture, improving their terms of trade. Meanwhile, EM credit risk premia are at two-decade lows, enabling refinancing at favorable terms and indirectly supporting equities.

Structural reforms add further depth. India has pursued a decade of reform in finance, infrastructure, and regulation, strengthening governance and deepening capital markets. Household consumption (roughly 60% of GDP) anchors growth, while corporates consistently deliver ROE above global averages. China, despite property sector headwinds, is stabilizing with targeted support and advancing innovation in EVs, batteries, and AI. Corporate governance is improving, with dividends and buybacks more than doubling in the past decade. The MSCI Factsheet points out that Taiwan and South Korea, resulting in nearly 30% of the MSCI EM Index, dominate the semiconductor supply chain. Taiwan produces almost 90% of advanced chips, while Korea supplies half of global memory chips – ensuring EM equities are integral to structural themes like AI and digitalisation.

MSCI EM Index Sector and Country Weights, 29 Aug 2025 (%)

Source: MSCI Factsheet

EM vs DM: Opportunities and Risks

While EMs strengthen, developed markets have stumbled. From 2020-2025, repeated shocks, like pandemic, energy crisis, trade frictions collided with structural weaknesses such as aging populations and high debt levels. Policy responses have often been constrained by fiscal dominance: in the U.S., debt has risen above 120% of GDP and the deficit reached 4.6% in 2024, while eurozone averages remain above 90% with Italy and Greece exceeding 140%. Rising debt service costs limit policy flexibility, undermining the perception of DM stability. Geopolitical uncertainty and reshoring trends have further raised costs, reduced supply-chain efficiency, and added financial risk. Meanwhile, the growth of non-bank finance has amplified vulnerabilities, with limited backstops in periods of stress.

EM ex China – US real GDP growth differential, 2019 – 2025, 2 quarters moving average (%)

Source: J.P. Morgan Asset Management, IMF

EMs contrast this picture with certain advantages: younger, expanding populations in India, Nigeria, and the Philippines; rapid digital adoption, such as India’s UPI processing over 10 billion monthly transactions in 2023; and abundant resources critical for the energy transition, from Chilean copper to Bolivian lithium. Large reserves — over $600 billion in India, $350 billion in Brazil, and more than $3 trillion in China — along with early monetary tightening have bolstered policy credibility.

However, risks remain. Political instability, weak institutions, and commodity dependence still shape vulnerabilities. Argentina’s triple-digit inflation, governance crises in parts of Latin America, and electoral risks in Africa illustrate persistent fragility. Commodity-exporting EMs remain exposed to price volatility, with shocks directly impacting fiscal balances and exchange rates.

In the short term, the outlook appears constructive. Over the next twelve months, many EM central banks are expected to have room to cut interest rates, supporting domestic demand and attracting foreign capital. If global growth stays weak, emerging markets could even become the main driver of global expansion. Over a five-year horizon, the picture becomes more uncertain. Much will depend on whether today’s fiscal discipline and stronger institutions prove structural or merely cyclical. The most likely scenario is that EMs consolidate their role as pillars of global stability, gradually reducing their dependence on developed markets. However, a downturn in the commodity cycle or the return of populist policies could revive old challenges of deficits, inflation, and currency crises, eroding part of the progress made since the 1990s.

The key question is whether these economies can transform short-term resilience into lasting stability or whether the next global shock will expose old weaknesses once again.

Written by:

• Maria Chasovnikova
• Claudio Di Nubila
• Demet Coskun
• Viola Castoldi
• Andrea Rusconi
• Carlo Conte
• Samuele Scattolon