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.

Contrary to the growth narrative, the MSCI China index returned just 3.4% over the last decade with over 24% volatility. During the same period, the emerging market ex-China index delivered a higher return of 4.8% with significantly lower volatility (17.5%), highlighting structural headwinds in China for investors.

While bullish on India, investors should note it's not participating in every global trend. Unlike North Asia (Korea, Taiwan), India is not a player in the "AI picks and shovels" hardware theme. It also lacks the investment drivers seen in Europe related to serving an aging population.

Beyond screening countries for freedom, the Freedom 100 EM Index also excludes all state-owned enterprises (SOEs) at the security level. This double-layered approach reinforces its core philosophy of avoiding government interference in markets, applying the principle from top-down allocation to bottom-up stock selection.

For global expansion, view countries as having unique attributes like players on a sports team. Outsized returns come from matching your business to a country's inherent 'raw material' strengths—such as leveraging the US for its market liquidity, or Australia for its abundant land and sun for solar projects.

Countries like Poland, which transitioned to capitalism relatively recently, are under-followed by global investors. This creates opportunities to find "boring compounder" stocks, such as supermarket chain Dino Polska, at attractive valuations. These businesses are often run by outsider CEOs and are insulated from global hype cycles like AI.

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.

Investors often incorrectly lump all Asian credit into a high-risk bucket associated with emerging markets or distressed property. This misperception creates undervalued opportunities in high-quality liquid markets, such as Japanese financials, which offer relative value without significant incremental risk.

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.