For traders, the defining characteristic of an emerging market isn't GDP but how its sovereign bonds behave during risk-off events. If bonds sell off alongside equities when volatility rises, it's an EM. If they rally as a safe haven, it's a developed market, regardless of economic metrics.

Contrary to fears of being a crowded trade, EM fixed income is significantly under-owned by global asset allocators. Since 2012, EM local bonds have seen zero net inflows, while private credit AUM grew by $2 trillion from the same starting point. This suggests substantial room for future capital allocation into the asset class.

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.

Active management is more viable in emerging markets than in the US. The largest EM ETF (EEM) has a high 0.72% expense ratio, the universe of stocks is twice as large as the US, and analyst coverage is sparse. This creates significant opportunities for skilled stock pickers to outperform passive strategies.

Many LPs focus solely on backing the 'best people.' However, a manager's chosen strategy and market (the 'neighborhood') is a more critical determinant of success. A brilliant manager playing a difficult game may underperform a good manager in a structurally advantaged area.

A powerful EM strategy involves identifying businesses with proven, powerful models from developed markets, like American Tower. Local EM investor bases may not be familiar with the model's potential, creating an opportunity to buy these companies at a displaced valuation before their predictable results drive multiple expansion.

Given the known flaws in EM benchmarks (duration, currency, instrument type), it's possible to construct a passive, rules-based strategy to correct them. This 'smart beta' approach can systematically deliver a better Sharpe ratio than the underlying index, even if absolute returns are lower before leverage.

While broad emerging market currency indices appear to have stalled, this view is misleading. A deeper look reveals that the "carry theme"—investing in high-yielding currencies funded by low-yielding ones—has fully recovered and continues to perform very strongly, highlighting significant underlying dispersion and opportunity.

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.