Emerging Markets: The Tide is Turning

Joseph Dore: I'm Joseph Dore, head of International Consultant Relations here at Allspring, and welcome to SpringTalk. Today, we're going to dive into one of the most compelling and perhaps surprising investment themes of 2025 and that is the resurgence of emerging markets equity (EME). And it's been a while since I've been able to say just that. So, with me to discuss said topic is not one, but two of Allspring's leading emerging markets equity experts who have more decades of experience investing in the asset class than perhaps they care to admit. Yes, we're lucky enough at Allspring to have a significant emerging markets equity platform. Two different teams in two different locations, Boston and San Francisco. So, starting off in San Francisco, in the blue corner in sunny San Francisco, I see, it's Alison. She takes a risk-adjusted approach, a total return approach, which includes a bias toward dividend-paying companies. And in the red corner in Boston, we have Derrick, whose team in Boston champions a quality-first and sequential value-driven approach. Derrick, Alison, welcome to SpringTalk.

Derrick Irwin: Thanks for having us.

Alison Shimada: Thank you.

Joseph: So, this is not my first EME podcast rodeo with either of you. However, this is indeed the first time I've had the chance to interrogate both of you at the same time in the same studio. As our listeners can certainly relate, navigating the last decade of EM volatility and, frankly, subpar returns if I can say that, has not been the easiest thing to do. So, we wanted to get complete representation from what you're both seeing in EM, across both your different perspectives. Let me start with giving the big picture. We're seeing some fascinating developments in emerging markets right now. Just taking a crude returns perspective, at the time of going live, I'm seeing the MSCI Emerging Market Equity Index has delivered just shy of 25% year to date, outpacing the S&P 500’s relatively measly 12% at the time of going live. I'm sitting in London today, and I will happily say in my finest London accent, mind the gap, as we like to say on the tube. So, I'm going to start with you, Alison. Is this return to emerging markets coming sooner than you thought it might?

Alison: Well, actually, Joe, I think it's actually not been sooner than we expected. We've been expecting this for a few years. I'm sure everybody is well aware that that anticipation took a little longer than we expected. However, it's been a stronger-than-expected return. So, I'd say when it showed up, it was very strong and has been and we expect that to continue.

Joseph: And if I look at some of the last podcasts we've done, Alison, we've spoken about a lost decade of EM. And we even asked our lovely clients at the last time of our recording to keep the faith in emerging markets. So, I'm pleased some people certainly hung on. Derrick, I'm going to turn to you. Welcome to the conversation. I appreciate you and your team are certainly bottom-up investors. You try not to get caught up in the noise of macro noise or you don't focus on technicals too much. But I also know that some EME technicals right now are potentially too big to ignore. So, Derrick, why don't you share with our audience members what you're seeing from a flow perspective right now in EM?

Derrick: Sure. Well, money is in motion. As you probably know, emerging market equities had pretty significant outflows over the last several years as investors really concentrated their holdings more and more in developed markets and particularly in the S&P 500. And that even continued into the beginning of 2025. But what we've seen since about April or so is a pretty substantial reversal. About $33 billion or more have flowed into emerging market equities since April. That's a pretty big reversal versus maybe about $200 billion or so leaving over the last several years. So, really, there is some money in motion. There is definitely a lot of room to go. When we look around the world at emerging markets representation in global portfolios, they remain very underrepresented. For instance, just in global funds, which are benchmarked to emerging markets in part, global funds are substantially underweight emerging market equities to the tune of somewhere between $300 billion and $500 billion. So, that's $300–500 billion of flows just to get in line with global benchmarks and doesn't include other sources of potential flows. We do see what is a trickle that could very well become a torrent of flows into emerging markets if trends continue.

Joseph: Great. So, a rising tide could lift all EME boats. Good to hear. Pleased to say Allspring got ahead of this tide, if we want to call it that. We've been running an equity campaign all year round. And, actually, a quickfire question for Alison. As part of the equity campaign, Alison, Allspring has been managing equities since when?

Alison: 1935.

Joseph: Correct. And it would have been embarrassing if you got that wrong. So, gold star for Alison. In addition to reminding our clients when we've been managing equities since, I know you and your team have also been banging the drum, making bold statements in the market, proclaiming the potential return of emerging markets. And a paper you wrote, a seminal paper, EM 2.0 (Emerging Markets 2.0: The Tipping Point Is Here)—pleased to say it was one of the best-read papers on our website all year, Alison. Congrats on that. Clearly in tune with what our clients are feeling toward the asset class. Alison, I want to give you the floor now to take our listeners through your concept of EME 2.0. The floor is yours, Alison.

Alison: Thank you. Well, I think what we've tried to illustrate is that we do see a new era of growth and relative outperformance of EM coming. And we anticipate that because there are a few signs that people look to commonly, which is number one, the decline of the U.S. dollar and the waning of U.S. exceptionalism, which we do see happening. And it's not that the U.S. will become irrelevant or could severely become to the side here or something. But we do think there's room now to consider other asset classes as a means of diversification. And there's a need to do that, given the uncertainty of U.S. policy and national policy with regard to military and unexpected events that could happen. So, we really see that the EM growth premium, whether it be India or China, is still intact. And there are green shoots in every region. We really are very positive about EM. And there's also support, due to valuation as well. And the last point I would make is that AI (artificial intelligence) is becoming a very large driver globally for not only developed markets but for EM, for which there would not be a U.S. AI presence without that of emerging markets and the supply chain.

Joseph: Follow-up question for you, Alison: How is the message of EME 2.0 being received across the world from U.S. clients to European clients and Asian clients? We'd love to hear of any discrepancies in how the message is going down.

Alison: Right. I think that Australasia, Asia in general, and Europe have been very receptive to this messaging and they've been looking for a turning point to come. I think that because they live in many of these markets or very close to emerging markets or they themselves are emerging markets, they are very receptive to that messaging. I think the U.S., because it's done so well, people have been a little bit more resistant, have taken more time and asset allocated. Not sure if this is a trade or if this is sustainable. So, our message, of course, is that it is a new decade and could be a new decade of growth, and we look for sustained returns.

Joseph: EME 2.0. You heard it here first. So, back to you, Derrick. I've also managed to get my greasy paws on a presentation you've been doing the global rounds on. I got the title of that. It's very direct. Simply, EM Is Back. Indeed, I've been listening and reading some of your media interviews recently. And, in a recent article, and I'm going to quote you here, Derrick, you spoke of a once-in-a-generation opportunity within emerging markets. I believe in a similar interview, you spoke about EM looking less relatively risky potentially to DM (developed markets). Now, this is provocative. Tell our audience members more what your thinking is here, Derrick.

Derrick: Sure, sure. And first, I want to correct you. It's not EM Is Back. It's EM Is Back! (Exclamation Point). That's very important.

Joseph: Ah. Apologies.

Derrick: But, look, I think you're absolutely right. The message that we want to send to our clients is this: We view and, I think, investors view emerging markets as certainly a diversification tool for our overall global portfolio, but I think it's generally viewed as a more risky asset class than, say, U.S. equities or developed market equities. And, I'm not sure that is as much the case today. The relative risk of emerging market equities versus developed market equities, in my view, is much less than it used to be. So, for instance, if we look simply at current account deficits—so funding needs for the major emerging market economies—in 2013, you may remember the taper tantrum when emerging markets really had a crisis around funding. They had very large current account deficits, and when it looked like the Fed (Federal Reserve) might raise rates, we had a real pressure on emerging markets. If we look at current account deficits for countries such as India, South Africa, Turkey, Brazil, you name it, those current account deficits have largely closed over the last decade and we are seeing much more resilient and stable economies. And that's really important when we think about risk. And not for nothing, the one economy where the current account deficit has increased substantially is the United States. So, I think about that from a stability standpoint. It's very significant. And, of course, the debt markets are ahead of us on this. We've seen upgrade after upgrade after upgrade among emerging market economies. Now the average credit rating of the emerging markets is now higher than it's been since 1991, again, which suggests to me a much less relatively risky environment. So, for asset allocators who are thinking about how to allocate capital around the globe, that's a very important consideration because you still have the diversification benefits of emerging markets, but maybe not as much risk, at least in a relative sense, to the developed markets.

Joseph: Alison, any comments from you? Are you buying that story from Derrick?

Alison: I love that story. I think it's very, very relevant. And I think that the difficulty is a very preconceived notion about EM that still holds from 14 years ago and the fact that people consider emerging markets a call option on growth only when your home market isn't working. And I do totally agree that the view should be actually reversed. There is exceptional risk in the U.S. in some respects.

Joseph: OK, Derrick, I'm going to stay with you. I just want to go back to a podcast you and I did a couple of years ago. So, on that podcast—it was two years ago now—we discussed a new asset class emerging within emerging market equities, and that is EM China. Fast forward to today. I think on that podcast, you hypothesized that it could emerge in quite a big fashion. Have you indeed been proven correct, Derrick? We'd love to hear your thoughts.

Derrick: So, yes, but not for the reasons we thought. How’s that? When we spoke two years ago, remember two years ago or so, China was approaching almost 40% of the MSCI Emerging Market Index. It was becoming almost too large and unwieldy for investors who wanted to access the rest of emerging markets. And there was real discussion around maybe carving out China as a separate asset class and the rest of EM kind of looking like Asia ex-Japan looks in Asia, right? Just EM ex-China, as it were. And, certainly, that was the view for a long time among asset allocators. And I think as China underperformed for a few years and became a smaller piece of the overall benchmark, maybe that thesis began to lose some steam. But, of course, as we've seen more and more tension between the West, as it were, and China, there is a renewed interest in EM ex-China—maybe not necessarily for asset allocation reasons, but for other reasons, whether they be political or economic—to remove China from their portfolios. So, we've seen some significant growth in our EM ex-China strategy. In fact, I believe we’re one of the top EM ex-China strategies now in terms of assets under management, but for very different reasons. So, it's been pretty interesting to see how that's played out.

Joseph: Indeed. I will refer back to things you said in previous podcasts, so do watch out. Alison, any thoughts from you from an EM ex-China perspective? I appreciate you come from a different perspective, given you run China-only strategies. What's your view on the universe?

Alison: I totally understand why people, as Derrick elaborated upon, were concerned about particularly the weighting of China. I do think it is relevant to the world and to emerging markets in particular because when the large countries outperform, then usually the asset class as a whole does. I think in running a China strategy, we see the opportunities to dial up or down the China exposure by using a separate strategy. So, that's something I still think is a possibility going forward.

Joseph: I'm going to stay with you, Alison, but we're going to switch gears entirely now. So, I know at the beginning of the year, you partnered with our friends at MSCI for a few investor sessions on a research paper undertook by MSCI. But I know the concepts really resonated with you, Alison and team, from a practitioner standpoint. So, for those of our audience members who haven't yet been lucky enough to hear what the revelations were from MSCI earlier this year, please enlighten our audience members as to what they've missed.

Alison: Sure. It was a piece that MSCI’s research published in February 2025 and they used three decades of data to elaborate on the drivers of total shareholder return in emerging markets, which I thought was relevant from a longer-term perspective. And what they found was that the return of capital policies, investment quality, and the balance between growth and profitability were key drivers to sustained equity performance. I think that MSCI also noted that active management was a key contributing factor to avoiding certain pitfalls, such as high share issuance by some companies and also the fact that there's lack of stock coverage after so long of a dry spell for 14 years. We lost stock coverage by the sell side. That's an opportunity for active managers to find value where people can buy lesser-known growth opportunities that people may not know about. Since the GFC (Global Financial Crisis), the highest total return companies have returned more to shareholders through dividends and were more consistent in sales and profitability patterns. But they weren't necessarily the highest growth companies, which is a thought that I hope that people will take away. It's not just about the highest short-term returns, but quality and shareholder return. Return to shareholders of capital is very important.

Joseph: So, Derrick, from your team's perspective, clearly, MSCI revealed once again that quality was a good way to go in terms of managing emerging markets equity. I want to know from you, how has it been being an investor in EM quality over the past couple of years? How's that gone?

Derrick: It's been a bit of a roller coaster ride, actually. The way I look at the world over the past few years is one of trying to find economic equilibrium post-COVID, right? So, whether it was the spike in inflation post-COVID, then the corresponding spike in interest rates, and now the decline in inflation post-COVID, the world has been trying to find its equilibrium. And I would say from an investing standpoint, it's been the same. So, we've seen investors swinging back and forth between quality and then other factors. For instance, at the beginning of the first six months of 2024, momentum dominated the markets and this was true in developed markets as well. But in emerging markets, for instance, the momentum index outperformed the broader market by about 11%. And just for reference, that's the most I've seen—that outperformance—over a six-month period since, probably not coincidentally, the tail end of 2007 right before the Global Financial Crisis. So, we see these swings of excess one way or another. And I think over the past 12 months, we have begun to find a certain degree of economic equilibrium. And now we're seeing fundamentals, both economic fundamentals and company fundamentals, coming back into play. And investors are really focusing much more on earnings expectations, growth expectations, and the quality of the underlying business.

Joseph: Great. You probably could have gotten away with saying mind the gap, Derrick, but you chose not to. So, staying with you, though, we haven't yet touched on market cap. Number one is, do you have the same concentration issues as we see in developed markets in EM right now? And number two, how's the relative value opportunity in small-cap versus its larger-cap counterparts in the EM right now? What are you seeing? And I know you have a big book of small-cap business, so you're pretty close to this.

Derrick: Sure. We do run an emerging market small-cap strategy, so we do have some pretty strong views on this. First, I think big picture, if we look over time, emerging market small caps have tended to outperform quite substantially; I think on a 5-year basis, they've outperformed something like 75% of the time. So, over time, they tend to be a very good place to invest—obviously, a little more volatile as we see everywhere else. But a really interesting spot in EM. To your question around concentration, we also have a concentrated benchmark, but we do benefit from a broader range of countries, and I would say even within those concentrated positions, maybe a broader range of companies and underlying drivers. So, that certainly helps. And then as I look at the opportunity set now, I think it's a little bit balanced between the two, but perhaps small cap has a little bit of an edge as tariffs begin to bite. Because it probably wouldn't be surprising to anybody to say that small-cap names tend to have more of a focus on the domestic markets and less exposure to global trade and trade, of course, with the U.S. So, there might be a slight edge in the small-cap universe in that sense.

Joseph: Perfect. Thank you, Derrick. I want to end today's podcast on something a little more fun—I guess a little bit more controversial. So, as our audience members may know, Allspring regularly does PM face-offs, and we're going to do a mini equity face-off right now. So, I have been slicing and dicing both your respective portfolios with my fantastic independent risk team, looking for regional differences where you may disagree. And, we're going to debate this out live right now on-air. So, the country I've chosen is the beautiful country of Indonesia. Derrick, looking at the portfolios, I believe you are an Indonesian bull right now. Correct?

Derrick: Yes, we're overweight Indonesia.

Joseph: Perfect. Alison, looking at your data, I believe you were a bull and now you've become more of a bear recently, correct?

Alison: Correct.

Joseph: Perfect. OK, well, let's debate this out. Let's face off starting with you, Derrick. Talk us through what you like so much about Indonesia right now.

Derrick: Sure. Well, there's no doubt in the near term Alison's call has been excellent and Indonesia has struggled. But I think, as Sir John Templeton said, sometimes the best time to buy is when there's blood in the streets. And the Indonesian economy has certainly hit an air pocket. And as you've seen recently, there's been some pretty significant political unrest. But, we look at the market and we think a few things. One, from a tariff standpoint, the Indonesian economy has quite low tariffs versus many of its Southeast Asian and Asian peers, which will give it an edge for exports. We think there's been a lot of investment in infrastructure that long term will allow it to grow. And then, maybe most importantly, given our process, is one that we find a number of very high-quality companies that are trading at a significant discount to our assessment of their long-term intrinsic value and that really drives our overweight. The kicker for us is that some of those names have pretty good dividend yields. So, while we're waiting for the blood to drain out of the streets, as it were, and the markets to come back, we are getting paid a pretty good dividend yield. So, we're happy to take that risk and wait for the Indonesian market to turn around.

Joseph: OK. Face-off over to Alison. Alison, what are you thinking? What's your, perhaps, opposing view to Derrick's?

Alison: Yes. Well, I acknowledge that there are some interesting stocks in Indonesia and we continue to look at it. But we have reduced our allocation and, over time, as a new administration under Prabowo has come into power, there are a couple of things that we are concerned about. Number one is that the cheap Chinese imports and the lack of leverage to fight against that. They are losing jobs in Indonesia, which for a country that has a large income gap, that's very critical to the country. According to Bloomberg, Indonesia has lost approximately 250,000 jobs in the textile and apparel industry over the past two years and is at risk of losing more this year. And also, the auto industry could come under stress, so we are concerned about that. And number two, I think that in ASEAN (Association of Southeast Asian Nations), you really need to have strong leadership at the top. And it's just my experience having been in the Asian crisis and the time of those previous social unrest protests, which were very violent in Jakarta, and I still remember that. However, we know everything develops, but I am not happy necessarily with the new administration. I think they have too many people in the cabinet. There are 48 ministers in the cabinet. I don't know how you run a government like that, number one. Number two, I do think this Danantara, which is the new sovereign wealth fund that was established, is at risk of misallocation of capital. I'm very suspicious of that. So, we would like to own more in Indonesia, but I feel that these considerations from a macroeconomic standpoint are concerning. And earnings growth is negative for the following 12 months here. So, we're taking a little bit of a wait-and-see approach.

Joseph: OK. Thank you both for that. That was our mini equity face-off. Let's see how that plays out. We love diversity of thinking at Allspring. So, sad to say we're nearly at the end of today's podcast. To end the podcast, I'm going to ask you both to do more than I usually do. I'm going to ask you to do more than just sum up. I'm going to ask you to give a quote. Derrick, you actually got ahead of that with your John Templeton quote. I want you to give a quote that will stay with our audience members long after listening to this podcast. Because, let's be honest—navigating EM has been a roller coaster ride. So, give us some words of wisdom, starting with you, Derrick, and you can stick with the first quote if you need.

Derrick: No, I think the quote I'd like to leave with, if I can make one up, is that emerging markets have gone from having potential energy—the opportunity to do well, the conditions developing for these markets to perform—to kinetic energy. These markets are performing, and I think that process has a long way to play out. And we should see that kinetic energy drive the markets higher over the next few years.

Joseph: Great. Nice work. Alison, try and trump that.

Alison: OK. That was a good one. I was thinking more of it's not timing the market, but it is time in the market that matters.

Derrick: Here, here.

Alison: So, I'm really hoping we can take the perspective of a longer-term view of the full market cycle, not just simply a quarter. And as Derrick said, we have a long way to go here. And they've lost a lot of value over time and it's coming back now. So, time to get in.

Joseph: Great. I love both of these quotes. I won't choose my favorite, but our listeners can. So, all there is to do now is to thank you both for your thoughts and your time. Always a pleasure hosting both of you. And to our listeners, thank you, as always, for joining us on SpringTalk. I referenced a lot of material that you can find on our website. There's a lot of EM on there. Happy reading, and we look forward to seeing you next time on SpringTalk. And when we are next debating EM, let's see if we're still saying mind the gap between EM and DM returns at that time. Thanks for listening.