Tested by Turbulence: Emerging Markets During Geopolitical Turmoil

Ann Miletti: I'm Ann Miletti, head of Equity Investments and chief diversity officer at Allspring Global Investments. Welcome to SpringTalk. Allspring’s 2026 outlook highlighted emerging markets as an opportunity—an area of the market we believed was undervalued and under-owned. We also highlighted geopolitical risks as the biggest threat to the markets. But it's fair to say we nor the market predicted that the U.S. would be engaged in a major military conflict with Iran before the end of the first quarter. So, today is a perfect time to reflect on our views and discuss where we stand on emerging markets in this current environment. I'm excited to discuss this topic with two of our investment experts: Alison Shimada, who leads our Total Emerging Markets Equity team, and Derrick Irwin, who co-leads our Intrinsic Emerging Markets Equity team. Alison, Derrick, welcome to SpringTalk.

Derrick Irwin: Hi, Ann. Great to see you.

Alison Shimada: Thanks, Ann.

Ann: Derrick, let's start with you. When you look at our thesis heading into 2026, does the thesis still hold? Are emerging markets equities undervalued and under-owned?

Derrick: Well, it's certainly been an interesting few weeks here in emerging markets. But I think that the thesis and the factors that were in play as we came into 2026 remain very much intact. Your question around whether emerging markets remain under-owned, I think, is a really interesting one. At the end of 2025, emerging markets as a percentage of global assets under management was about 5.3%, which is very low—well below its 10-year average or even the 20-year average of ownership of emerging markets—after a decade of investors’ outflows and as investors piled into other markets. So, we think there is significant headroom for emerging markets to attract more capital. According to JPMorgan, for instance, if we just go back to that 10-year average of about 6.7%, that can be over $500 billion of inflows. So, yes, I would say they're under-owned.

Ann: Thanks, Derrick. I mean, as I think about the first two months of the year, we started off in a very different place than we did entering March. And, so, Alison, maybe if you can just reflect on the start of the year and how the dynamics have shifted as we exited March.

Alison: Well, I think, Ann, the first two months were really a reflection of the end of the year. As Derrick mentioned, we came off of 2025 with a very strong momentum in terms of investor sentiment as well as the flows, as well as the fundamentals being strong in emerging markets. And I think that investors globally were looking for diversification perhaps a little bit away from the U.S. because they had very large holdings in the U.S.—had been concentrated there for a decade. So, I think that this push toward diversification—and that included emerging markets—was just starting and I think that it does continue today. It will continue. And I think that's been a severe disruption over a very short period of time, but that does not mean it cannot reverse.

Ann: I think that's such an interesting point, Alison, because I would have said emerging markets were the quiet winner of 2025. It was something that didn't get talked about a lot until the end of the year. And, certainly, it looked like the beginning of the year was getting off to a strong start until we entered the conflict. But maybe just shifting gears briefly, it's almost impossible to have a conversation with anyone surrounding emerging markets without talking about currency. And, clearly, the dollar was in a much different place at the beginning of the year than it is today. How does that influence the way that you look at the emerging market space? And maybe, Derrick, we can start with you.

Derrick: Look, we're not in the business of trying to predict the short-term swings in the dollar. And, certainly, when we see geopolitical challenges like we've seen over the last month, that tends to be very positive for the dollar. But I think you have to look at it within the context of a little longer time period and maybe a little broader picture. The dollar remains relatively expensive. It is still close to multi-year highs versus its trading partners. And I think that there are several factors that are probably pushing the dollar down long term. Certainly, there's been a move toward diversification away from the dollar. I was just reading today that global trade done in dollars is down 40% over the last several years. And U.S.-denominated cross-border loans are at about 60% of total loans, which is a multi-year low. So, we are seeing global investors and countries really moving away from the dollar. Certainly, lower interest rates, to the extent that that continues, will be pressuring the dollar down. I think our administration would like to see a weaker dollar. And, frankly, one of the great predictors and most reliable predictors of the direction of the dollar is the U.S. federal deficit. And the higher that goes, the more pressure it puts on the dollar. And I think we've seen that deficit really move up and that should pressure the dollar. So, in the near term, when we see these dislocations and the geopolitical troubles, it tends to push the dollar up. But I think the long-term direction of travel is pretty clear.

Ann: Alison, it seems like we can't really ignore the energy space, given the conflict in Iran and what's going on. And, certainly, as I talk to you, historically, there are regions in emerging markets that are more energy independent, but certainly ones that are very dependent on energy. Has the energy sector and or other resources really changed your view on certain regions?

Alison: I think going forward, Ann, the interesting development, I believe, is the fact that those countries that do readily have access to energy supply as well as commodities have a slight advantage now because people will value these things and access to metals and mining, to oil and gas, and see that as a potential positive for each country. So, yes, I think it has changed my view, certainly, that hard assets and the access to those hard assets become positives. Those countries that do not readily have that access are a bit disadvantaged, and this war has demonstrated that. I also think size is an issue. Those countries that are larger with a variety of access to various types of metals and energy sources are important and will benefit. I think China is one of them. I think Brazil is another one. But even those countries that are slightly disadvantaged, like India, like some of the ASEAN (Association of Southeast Asian Nations) countries—which I think are somewhat hard hit—have been doing measures such as rationing of fuel and energy sources. They have been putting caps on fuel and gasoline to consumers to try to help mitigate the impact to consumers. And, also, I think that they've been trying to find alternative sources of energy. So far we've been able to offset, but the longer that this situation goes on, of course, certain countries—particularly some of the smaller countries—will be at a bit of a disadvantage, I think, going forward.

Derrick: I would agree with that, for sure. I would say, certainly, when we look at renewable energy, emerging markets in many ways dominate that space. Particularly, China is probably the dominant producer of solar and wind projects in the world. So, emerging markets have recognized this challenge for some time and I think have been addressing it. And, secondly, from an investor standpoint, I think that's reflected in our opportunity set. So, if you look at emerging markets beta to oil—I look at their 5-year beta, it gets a little bit longer term—that sensitivity to oil prices is the lowest it's been in 20 years. So, if we look at the opportunity set that we have as investors, it's not nearly as sensitive to movements in the oil price as it was, say, 10, 15, 20 years ago. And, so, that has significant implications for how we allocate capital within emerging markets.

Ann: I think what you highlight is the value of active management, especially during periods of volatility like we see today. If you think about the ripple effects that maybe people aren't talking about today, is there anything that you see? One of my favorite phrases that I've heard throughout my career is listen for the quiet. When you listen for the quiet, are you hearing anything that you're not hearing others talk about?

Derrick: Yeah, I was thinking about that phrase this morning, in fact, and I think that there are a number of factors that really come into play, particularly with regard to emerging markets. The first one is that while this seems like an earth-shattering event—and, certainly, it's one of the biggest energy crises that the world has faced in a very long time—these things tend to move in predictable cycles. So, we have the initial shock, which was the invasion of Iran, and then stress with regard to higher oil prices. And then the markets begin to respond and governments begin to respond, and I think that's the phase that we're in now. And the final phase is recovery, where, in this case, oil prices recover, the markets recover, and often it precipitates a very, very strong rally. So, I think that that pattern hasn't changed. The timing is always very unclear. But from our standpoint, we know that it's an opportunity to upgrade the quality of our portfolio and take advantage of maybe some of the more extreme moves in the market to buy companies that we think are long-term winners at a discount to their long-term intrinsic value. So, for us, I think what people are missing is that we've seen this before. And it may seem scary, it may seem unusual, but for folks like Alison and me who've been in the market for many, many years, this is not necessarily new. It's just a different tune.

Ann: Thanks, Derrick. Alison, I think Derrick highlighted something really important. It is the opportunities that you can find during a crisis or during larger volatility. As you're looking at emerging markets today, are there certain things that are being highlighted to you, either through valuation or through the fundamental analysis that your team is much more interested in?

Alison: Definitely. We see value in emerging markets. I think that in general with regard to the markets, the dip will be bought because people did want to be in emerging markets before this happened and that trend is only strengthened, in my opinion. So, the money will come back and the valuations of the stocks that we see in emerging markets are very supportive to that. If they were reasonable versus developed markets before, they're more reasonable now. So, we are seeing a really large variety of stocks that we can add to or we can purchase it for the portfolio anew that we did not have the opportunity to buy before. So, with a 15%, 20%, 25% earnings growth profile plus a shareholder return of anywhere between 3% to 5% to even 7% sometimes, it's very attractive. So, I really feel that there are a lot of opportunities. And with active management—and really on the sell side, kind of a lack of focus on the positive sides of these companies—I think it's a great opportunity because you see a lot of mispricing and the whole asset class is sold off. So, we're quite excited.

Ann: If I just go back to where we were at the beginning of the year, there were so many opportunities that we talked about. And I know you both mentioned a few of them in your comments earlier, but if you can just go back and think about the true fundamental drivers behind the regions and the companies within emerging markets, what are the things you still want to highlight and make sure that investors know that's going on in this space?

Derrick: Maybe I'll start. I think Alison touched on a lot of that. But, look, coming into the year, there were a number of factors that were really tailwinds for emerging market equities. One, earnings growth was and remains excellent. We expect earnings growth in 2026 to be very strong and that really hasn't changed much even given the challenges in Iran. And, second, emerging markets came into 2026 with excellent economic activity growth across a number of regions and countries and with inflation trending down. Now, clearly over the last month, we'll see a spike in inflation. We'll probably see a hit to growth, but I'd much rather come into that crisis with those factors going in the right direction than the opposite of that. So, I think we came into the Iranian crisis in such good shape, it allows us to weather a bump like this.

Ann: Derrick, I agree. One of the things that I checked on before we had this conversation was earnings growth. And if you look at the MSCI EM (Emerging Markets) Index, it's more than 35% growth for 2026. And that compares to the S&P 500, which is kind of in the mid-20s. And as Alison pointed out earlier, the multiple is pretty discounted as well. So, I think that is an important factor. Alison, just to follow up with you—again, a lot of tailwinds coming into the year—what are some of the things that stand out to you?

Alison: Well, I would say in addition to all the things and the factors that Derrick mentioned, which I agree with, I would say that thematically, AI (artificial intelligence) and AI-related plays in emerging markets are much cheaper than in the U.S. and in the developed countries. And it is not irrelevant. AI continues on. The capex (capital expenditure) being spent on AI—whether the monetization happens sooner rather than later, it's still up in the air—but I still think that the companies will continue to go forward. So, the supply chain being in emerging markets is very central to that argument and things have really, to this day, not changed. So, I think to have exposure to that area is still very interesting. I also think that the commodity space took a bit of a hit on the news of the war, primarily metals and mining. However, I think that they are also very important to the story for the global economy, not just emerging markets—i.e., copper, aluminum, gold, silver, platinum, palladium. So, any and all of these areas will still be relevant once the war has concluded or has turned in a different direction. I think that those two areas specifically are interesting. And then, one last thing is I think the financialization of savings in emerging markets is a key driver to the capital markets because local investors—not foreigners, but local investors—support their own markets and invest in their own markets. And this is true of places like India, like China, like Korea in Asia, but also in South Africa, in other countries in the Middle East, people are very interested in the capital markets and are investing their own money—retail investors in the markets. And that's very supportive overall. So, I think this somewhat-outdated idea that emerging markets are dependent upon foreign investors needs to be updated.

Ann: Alison, I think what you're saying is very interesting. If I could just sum it up, there is a maturity happening in the emerging market space that many people aren’t talking about. And AI is somewhat of a hidden gem within the EM space. Derrick, would you agree with that? Is AI a real theme for emerging markets?

Derrick: I think I'm struck by, when I speak to investors in the U.S. and in the West, how little they understand about the AI opportunities in emerging markets. So, obviously everyone knows about the big chip makers—the Samsungs and the TSMCs of the world—but if you look at how AI is developing, particularly in China, it's almost an entirely separate ecosystem than what we're seeing in the West. And the big difference, to generalize, is I feel that the players in the West are really looking to make the biggest splash, the best model ever, cutting edge of new models, whereas in China they're saying, can we make very, very good models, and can we put them to work immediately to increase returns? So, a lot of the AI work is being done by some of the large players in China where they already have a competitive advantage and where they can plug in their AI tools and start getting benefits right away. And I think that's a different mindset. It makes for, I think, a higher return earlier on AI. So, I think there's some tremendous opportunities. And, by the way, if some of the big players in the West decide to slow down their capital expenditure, certainly that hits the chip makers in Korea and Taiwan. But China is effectively insulated from that. So, it gives us, in many ways, a real diversification within the AI trade.

Ann: Thank you, Alison and Derrick, for joining me today. I always learn a lot when I speak with you.

Alison: Thanks, Ann, for the conversation. It was very interesting.

Derrick: Always a pleasure. Thanks for having us.

Ann: And to our audience, thank you for joining us today on SpringTalk.