Investing in emerging markets: beyond the volatility trap
22 JUN, 2026
By Diogo Verde from Millennium bcp
By Dan Cartridge from Hawksmoor Fund Managers
By Karol CIuk from Pekao TFI S.A.
Emerging markets are back at the centre of the investment debate, and for reasons that have little to do with the old playbook. Where EM equities were once regarded primarily as a proxy for Chinese growth or commodity cycles, they are now increasingly seen as an integral component of the global AI supply chain – a shift with profound implications for how the asset class is priced and positioned.
Karol Ciuk, Head of the Global Strategies Team at Pekao TFI, captures the transformation succinctly: investors have begun 'looking at emerging markets less as a convergence trade linked to the growth of the Chinese middle class or India's economic boom and more as a raising part of the global AI supply chain. Taiwan and South Korea alone represent over 40% of the MSCI Emerging Markets Index, with semiconductor giants such as TSMC, Samsung Electronics and SK Hynix now among its central drivers.
The earnings implications are striking. Consensus estimates point to EM earnings growth potentially reaching a record 55% this year, driven largely by extraordinary profits in the technology sector. Crucially, even stripping out technology, Ciuk notes that growth expectations for EM equities remain close to 20% – above developed market levels.
Volatility in context
One of the most persistent misconceptions about the asset class is that EM volatility is categorically worse than that of developed markets. The data challenge this view. Dan Cartridge, Fund Manager at Hawksmoor Fund Managers, points out that over the past decade, the weekly annualised volatility of the MSCI Emerging Markets index (15.2%) has been broadly in line with MSCI Europe ex UK (15.8%), MSCI Japan (15.9%) and even MSCI USA (16.0%) — while EM delivered total returns of 163.9% over the period, outpacing the UK, Japan and Europe ex UK.
The evidence of the past decade, Cartridge argues, suggests that the asset class is far from a volatility trap. EM equities also bring diversification benefits through moderate correlation to major developed market indices — an often overlooked structural advantage.
Structural reform as a return driver
Beyond the AI cycle, a second, more idiosyncratic dynamic is at work: corporate governance reform across the emerging world. Cartridge draws a direct line from Japan's governance revolution to a broader trend now visible across the EM universe. Chinese State-Owned Enterprises have shifted towards shareholder-friendly priorities, while South Korea's 'Value Up' campaign has contributed to a material re-rating of that market. Indonesia, Thailand and Vietnam are also making progress on improving governance standards.
This matters for active managers because it creates a 'self-help' return driver that is decoupled from global macro. Over the medium to long term, Cartridge argues, improved shareholder protections should reduce the perceived riskiness of the asset class and support sustainably higher valuations.
Fixed income: stronger buffers, selective opportunity
The case for EM debt has also evolved. Michał Krajczewski, Head of the Investment Advisory Team at BNP Paribas, notes that most EM central banks raised interest rates faster than their developed market counterparts following the post-Covid inflation surge. The result: better inflation dynamics, greater resilience to rebounding commodity prices, and – crucially – fiscal positions that are now visibly stronger than in many developed economies. The risk-to-return ratio is fair in this case, Krajczewski concludes, and investors are compensated for volatility.
For Diogo Verde, Fund Selector at Millennium bcp, the key shift is that emerging markets are no longer entering periods of volatility from a position of weakness. With improved fiscal discipline, stronger external balances and more proactive monetary frameworks, he sees a meaningful buffer supporting a potential recovery in EM debt in the second half of 2026. Performance is increasingly driven by domestic cycles rather than purely global factors – a structural enhancement to portfolio diversification.
Dispersion, concentration and the limits of passive exposure
Not everyone is equally constructive, and the nuances matter. Verde flags that while the macro backdrop has improved, near-term risks are real. In March 2026, EM assets came under renewed pressure as a stronger dollar and global energy security concerns pushed investors towards US safe-haven assets. The main constituents of the MSCI EM Index remain structurally exposed to imported energy, leaving them vulnerable to supply shocks. April inflation data across several EM economies already pointed to a material rise in fuel prices.
Ciuk adds a structural caution: concentration risk is becoming increasingly important. A relatively small number of companies are responsible for a disproportionate share of earnings growth and index performance. Under UCITS diversification rules such as 5/10/40, actively managed strategies cannot meaningfully overweight a stock like TSMC – which represents roughly 14% of the benchmark – creating a structural tension for high-conviction managers.
The bottom line: selectivity over beta
The experts converge on a shared conclusion, even if they arrive from different angles. Verde puts it plainly: 'emerging markets are neither a pure opportunity nor a simple volatility trap – they can be both. The difference lies in how they are approached.' In a landscape where country-level dispersion has widened significantly, broad exposure is increasingly blunt. Selectivity, active positioning and a clear understanding of underlying risks – whether geopolitical, inflationary or structural — are what separate return from regret.
For disciplined, active investors, the asset class continues to offer compelling risk-adjusted opportunities within global equities. The era of treating EM as a monolithic beta trade is over.
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