The outdated frame
For years, EM was boxed as a commodity proxy, a levered play on China, or a diversifier in a DM‑centric portfolio. The economic architecture has shifted: EM and developing economies now account for the majority of global GDP on a PPP basis and growth projections expect that gap to persist. But more important than growth differentials is what’s powering them: stronger balance sheets in many markets and faster‑moving policy frameworks.
The new EM reality: Bigger, faster, more flexible
With a handful of exceptions, the public and private debt burdens across large parts of EM remain meaningfully lower than in many advanced economies, which gives policymakers more room to act. We saw that difference in the post‑pandemic cycle when several EM central banks moved earlier and maintained positive real policy rates, stabilizing currencies and protecting domestic savers rather than chasing the market mood. This isn’t the EM of the 1990s. Leading EM economies have the institutional capacity to act, and to act first.
Trade exposures have evolved, too. China’s export share to the US has fallen while intra‑EM trade has risen; Europe’s trade deals with India and Mercosur underscore a rewiring of demand corridors that diversify away from a single external engine. Sensitivity to the US cycle persists in places like Korea, Taiwan and Mexico, but the direction of travel is toward regional ecosystems with their own sources of demand.
From old economy to the innovation trinity
Look under the hood and the sector story is even clearer. In 2008, extractive industries dominated EM equities. By 2025, technology became the largest sector, with materials and energy still relevant but no longer in the lead. EM’s value creation now clusters around an innovation trinity: AI hardware and advanced semiconductors, the energy transition (from batteries to solar components), and digital infrastructure. These are industrial ecosystems backed by policy, talent and scale, especially in Taiwan and Korea where supply chains run from upstream materials to back‑end testing and packaging and are not easily replicated elsewhere.
Digital infrastructure is more nuanced, US hyperscalers still own global platforms, but leapfrogging is real. In markets where branch banking and card networks were thin, mobile‑first finance scaled fast; ‘super‑apps’ stitched payments, commerce, communications and entertainment into a single experience. The result isn’t a DM clone but a different operating system for monetizing digital adoption at speed.
Domestic capital: The quiet revolution
Rising living standards and maturing financial systems are reshaping who sets prices in EM equities. Local savings pools such as pensions, sovereign wealth funds, and insurers now anchor liquidity in several large markets. When domestic investors are the marginal buyer, markets are less hostage to hot foreign money and the boom‑bust cycles that defined prior eras. Consider India: since 2015, regulatory reform and scaled systematic plans have created steady equity inflows from state plans and retail investors, providing a bid even when foreign flows turn cautious. Brazil offers a different path to the same destination as fintech‑enabled access brings tens of millions into formal investing.
Volatility is converging by design, not luck
One result of these structural shifts: EM equity volatility has converged toward DM levels over the past decade. Some of that reflects where crises actually originated this century (the GFC, eurozone debt and recent idiosyncratic bank failures in advanced economies). Much of it is endogenous, driven by deeper local savings, more credible policy frameworks, and real rates that reward prudence over leverage.
EM is a mosaic, not a monolith
If there’s one mistake investors still make, it’s treating EM as one story. China’s debt dynamics rhyme with parts of the G7. India’s equity market is propelled by domestic flows and digital rails. Policy reform cycles in parts of Eastern Europe and the Gulf are opening new corridors of capital. Heterogeneity is the feature, not the flaw. It widens dispersion and, for active investors, expands the opportunity set. The implication is straightforward: avoid ‘average EM’ exposure and favor selective, research‑led allocation that differentiates among countries, sectors and companies.
What to do now
The cycle that began in late 2024 may be less spectacular but more enduring because its drivers are broader and domestically anchored. Treat EM not as a tactical overlay but as a core, structural component of global equity allocations. In practice, that means prioritizing the innovation trinity where ecosystems are hard to replicate; calibrating country weights to policy flexibility and real‑rate support; and acknowledging that deeper domestic ownership can dampen drawdowns and lengthen holding periods. Build positions for what EM is, not what it was.
Author note: Jan de Bruijn is a Client Portfolio Manager with the Robeco EM equities team. Views are his own.
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