Unlike previous years dominated by a single theme, 2026 will require a more nuanced approach. Performance will be driven by a range of factors including country-specific fiscal dynamics, the end of rate-cutting cycles, election outcomes, and beneficiaries of AI capex. Investors must move from a single macro view to a multi-factor differentiation strategy.

During periods of country-specific fear or uncertainty, investors sell off all assets indiscriminately. High-quality companies are discarded along with low-quality ones, making country-level risk analysis more critical for investors than sector or individual company analysis.

Citing research from Verdad's Dan Rasmussen, the speaker notes that EM assets perform best when purchased during a crisis that originates in developed markets (e.g., the GFC or COVID). Panicked selling creates widespread mispricing in EM, even though the region is not the source of the crisis, offering a prime buying opportunity.

Emerging vs. developed market outperformance typically runs in 7-10 year cycles. The current 14-year cycle of EM underperformance is historically long, suggesting markets are approaching a key inflection point driven by a weakening dollar, cheaper currencies, and accelerating earnings growth off a low base.

While US equities have traditionally been a bellwether for global sentiment, a significant rotation is underway. Stagnant US tech stocks are being overshadowed by strong performance elsewhere, with European equities up 6% and Emerging Market equities up 13%. This suggests capital is flowing into other markets, reducing EM's dependence on US performance.

Despite alarming geopolitical headlines concerning Venezuela, Iran, and US-NATO relations, emerging markets are showing resilience. Investors are largely ignoring this "noise," focusing on the strong cyclical backdrop: upward growth revisions, loose financial conditions, and supportive commodity prices. Markets are prioritizing the global economic outlook over political shocks unless those shocks directly threaten growth.

The link between emerging market currencies (EMFX) and US tech stocks is not about the tech sector itself. Global equity markets have become a unified signal for the global economic cycle. A sell-off worries investors about global growth, impacting risk-on EM currencies regardless of their direct tech exposure.

At the IMF meetings, investors showed surprisingly upbeat sentiment towards Emerging Markets (EM), despite the Iran conflict. This suggests markets have already priced in a high probability of de-escalation and have strong confidence in EM policymakers' credibility, creating a potential disconnect between market mood and actual geopolitical realities.

EM assets show resilience to headline volatility because investors learned from past "on-off" tariff threats not to overreact to U.S. statements. This hesitancy to respond to policy that can be reversed in a tweet creates a buffer against short-term swings, contrasting with more reactive markets like U.S. equities.