Emerging economies shine despite US volatility

Despite the risks of Donald Trump’s aggressive protectionist agenda, the mood among policymakers and central bankers at the Conference for Emerging Market Economies in AlUla, Saudi Arabia, this week was cautiously upbeat. Assets across the ragtag grouping of economies have been on a tear. Last year, benchmark equity indices in countries including South Korea, Poland and Vietnam more than doubled the S&P 500’s 16 per cent gain. Returns on local-currency bonds and sovereign credit outpaced developed markets too. The rally has rolled on into 2026.

A weak dollar, in part a byproduct of the US president’s capricious approach to policymaking, has helped. International investments now look more attractive, and developing economies’ dollar debts and import costs have fallen. In other words, as America has started to display traits investors often associate with risky emerging markets, actual EMs have prospered. But the desire to diversify US-centric portfolios and the softer dollar are not the whole story. There are structural drivers, too.

First, developing nations are far more resilient than they used to be. Research by the IMF shows that portfolio outflows, real GDP and exchange rates have become less volatile in emerging markets in response to risk-off shocks since the global financial crisis. There are exceptions, but this reflects more disciplined fiscal and monetary policy, and stronger foreign reserve buffers.

Policymakers have also been pragmatic in responding to US tariffs, cushioning the blow through negotiations, new trade deals and domestic reforms. Last week, Indian stocks jumped the most in eight months after Trump announced an arrangement with Prime Minister Narendra Modi to lower duties.

Next, many emerging economies are no longer peripheral players in global trade and manufacturing. The 10 emerging-market members of the G20 — including China, India and Brazil — now account for more than half of global GDP growth. Export powerhouses such as South Korea, Vietnam and Taiwan have benefited from the AI boom, supplying chips and high-tech components to US hyperscalers. Many emerging Asian economies have embedded themselves more deeply in non-US supply chains too.

Rapid urbanisation, rising consumer classes and large labour pools mean investors are beginning to view emerging market businesses as more than just a portfolio hedge. Valuations reinforce the case. Emerging market equities remain attractively priced relative to developed peers after being unloved for so long.

None of this means risks have disappeared. If the US Supreme Court strikes down Trump’s reciprocal tariffs, fresh attempts to reimpose duties through other legal routes would revive trade uncertainty. The dumping of Chinese goods remains a worry, and a slowdown in the AI investment cycle would hit technology exporters hard. Several countries remain fragile. For instance Indonesian assets have come under mounting pressure after lax fiscal measures under President Prabowo Subianto, and his recent nomination of his nephew as deputy governor of the central bank. Trouble in one country still has a habit of sapping wider confidence in emerging markets.

For the investor interest to endure, developing economies need to build on their resilience. That means doubling down on credible fiscal frameworks and monetary policy, building new trade ties and supporting the development of services sectors to act as a shock absorber. Opening their financial markets further by strengthening corporate governance, improving disclosure standards and deepening market oversight would help turn hot money into stickier investments too. Whether last year marks the start of a lasting rally or another false dawn will depend as much on the policy choices made in Jakarta, Abuja and beyond, as on Washington’s mood swings.