Because emerging market cycles are so unpredictable and violent, any mid-sized manager focused on a single asset class or region is not questioning *if* they will go out of business, but *when*. Business model diversification is the only path to long-term survival.
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The developed market private investing model of single-asset-class funds (PE, credit, infra) is poorly suited for emerging markets. The deal flow in these regions is insufficient to support such specialized funds, leading to poor capital deployment and failing GPs.
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.
A more robust diversification strategy involves spreading exposure across assets that behave differently under various macroeconomic environments like inflation, deflation, growth, and contraction. This provides better protection against uncertainty than simply mixing asset classes.
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.
After years of piling into a few dominant mega-cap tech stocks, large asset managers have reached a point of peak centralization. To generate future growth, they will be forced to allocate capital to different, smaller pockets of the market, potentially signaling a broad market rotation.
Unlike older Western wealth, recent Asian wealth is often highly concentrated in the business that created it. This creates significant correlation risk. A primary role for financial advisors in this market is to act as a trusted counterweight, pushing founder-clients to diversify into different sectors and currencies.
Within any emerging market country, the annual return dispersion between equities, local debt, and hard currency debt is enormous. An investor who can consistently pick the winning asset class, even just over 50% of the time, will generate superior long-term returns due to this massive performance gap.
In emerging markets, where 'six sigma' events happen frequently, statistical risk models like Value at Risk are ineffective. A more robust approach is scenario analysis, stress-testing portfolios against specific historical crises like 1998 or 2008 to understand true vulnerabilities.
Alan Waxman argues that the rapid pace of global change means investment themes are no longer multi-year theses. He believes a theme's shelf life is now just 12 to 36 months, demanding a flexible, multi-strategy approach to constantly migrate capital to the best risk-reward opportunities rather than staying in one vertical.
Despite a supportive macro environment, the most immediate threat to emerging market assets comes from increasingly crowded investor positioning. As tactical indicators rise, assets become vulnerable to sharp corrections from sentiment shifts, a dynamic recently demonstrated by the Brazilian Real's 5% drop.