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The Macro Brief – The case for emerging markets
933 Plays1 month ago
Following a standout 2025, Ali Cakiroglu, Emerging Markets Strategist, looks at the drivers for EM assets in 2026.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/KbNBtFl
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Transcript
Introduction to HSBC Global Viewpoint
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Emerging Markets 2025: Are Success Factors Still Valid?
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This is the macro brief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets. I'm Piers Butler, and on today's episode, we're assessing the prospects for emerging markets.
00:00:42
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EM enjoyed a standout performance in 2025, but are the factors that underpin those gains still in place? Well, to find out, I'm joined in the studio by Ali Chakiroglu, emerging market strategist. Ali, welcome to the podcast. It's great to be here, Piers. So let's start with a quick look back.
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Yem had a good 2025. How good was it? It wasn't only good. It was a great year for emerging markets.
Performance of Emerging vs. Developed Markets
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When you look at the asset performance, they outperformed all their developed markets. And when we look at equities, they were up 27 percent.
00:01:14
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Fixed income local currency that was up 17 percent and hard currency that was up 13 percent. And this is despite all these tariff worries, trade tensions, lingering geopolitical issues, and um as well as the fiscal concerns, particularly in the developed world.
00:01:29
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When was the last time that emerging markets performed that strongly? It was 2017. Can you remember? Yes, it's been a while, that's for sure. It was 2017. And this was an episode where we were actually talking about a synchronized global recovery with both the U.S. economy and the Chinese economy growing on all cylinders, which was also helping with lifting all global economic activity, global growth.
Growth and Inflation in Emerging Markets
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Okay, so let's look at the drivers for this performance and how maybe they can be maintained for 2026 or well maybe not. Firstly, the macro backdrop. There is, in fact, a chart in the report that you've just published that tracks EM's growth inflation mix. And it's really striking how they've gone in opposite directions. So growth has shot up and inflation has come down. What was behind that?
00:02:14
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It's like em in Goldilocks, right? yeah And I guess there are a couple of reasons for that. Obviously, you know, once we had the Liberation Day announcements in terms of tariffs, there was huge expectations of a sh sharp slowdown in economic activity, which didn't materialize. When you look at the economic activity, exports were really resilient. And not only the exports, but private domestic demand was also quite strong. And this was on the back of the rate cuts by emerging market central banks, which helped with the financial conditions and as well as reviving the overall domestic demand conditions. And in terms of inflation, I would say that it was mostly a function of the very prudent monetary policies of emerging market central banks, often particularly in the last couple of years, which end up with the bringing inflation down. And this this led to these positive spillovers, both growth holding up, but inflation declining at the same time.
Supports for Emerging Market Performance
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Within that, because I remember the sort of shock and awe of Liberation Day and expectations that trade would be very much affected, but the reality is that trade has continued to power ahead. That's very true. And I guess there are a couple of reasons for that. For starters, we have seen some sort of broad forward demand, that's for sure, especially from large economies. But at the same time, We've also seen some other trade channels among emerging markets. South-south trade has picked up as well. And all these are factors that have supported the exports as a whole.
00:03:44
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So another factor in emerging markets, which is really important, is liquidity. And there's another great chart in your report, which tracks EM financial stress and which has declined to its lowest level ever. Indeed. Was liquidity a factor behind that?
00:03:58
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Liquidity was not purely a factor of that, but liquidity is important for a couple of reasons. For starters, it is a leading indicator for portfolio flows into emerging markets. And once we are starting, you know, liquidity conditions easing, it also, in a way,
00:04:14
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implies that financial flows into emerging markets could accelerate over the coming periods, usually a lack of between six
Investor Sentiment and Macro Volatility
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to nine months. But as for the emerging market financial stress, the reason behind that was more to do with the decline in macro volatility, which also spilled over into financial market volatility, hence creating this very favorable backdrop as decline in financial stress.
00:04:38
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And then the third factor, which also matters a lot in terms of emerging markets, is positioning, which we track with our proprietary emerging market sentiment survey, where positive sentiment is at a record high, in the latest one that you published.
00:04:53
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That's correct. We published the latest sentiment survey in December 2025, and this was our 22nd edition of the of the survey. So we have quite a history of monitoring where that sentiment indicator is. Indeed, we do have that. And the latest survey actions showed that 63% of survey respondents are bullish on emerging market prospects. And one interesting statistics from that survey is the share of bearish views.
00:05:20
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None. They have gone. So the net sentiment at 63% was the joint record high of the survey's history, which started in June 2020. And we also asked this question as to how much cash fund managers are holding. And that's...
00:05:35
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at an all-time low as well, isn't it? That's true. It also implies that to some extent investors have been adding some position and we actually saw that in our positioning question when we ask investors to what extent are you overweight, underweight or neutral in each of the asset classes. a Majority of investors were overweight across all asset classes and we have seen some pick up compared to the September survey. The only exception was the local currency that were Even though the net sentiment was still overweight or the net positioning was still overweight, there was a so ah slight decline.
00:06:09
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Right. So you know what I'm going to ask next? Can it last? Some longtime investors would say that you don't buy emerging markets, you just rent them because they're very cyclical and you need to get your money out when the cycle turns. But I'm sensing from your response that it feels like something more structural is going on here.
00:06:26
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I think it's still too early to say that you know something structural is going on, but it definitely appears to be that you know stars are aligning for emerging
Opportunities in Specific Emerging Markets
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markets. Global economic activity is holding up. EM's own fundamentals are improving. And as a matter of fact, EM's policy mix is also turning much more credible when you look at the monetary policy, fiscal policy, everything is moving in the right direction for now.
00:06:50
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So when we look at EM, it's a broad category. It's Asia. It's also Latin America. Are there any countries that you'd like to highlight in that context? Well, I can say that we still see interesting opportunities in mainland China. Obviously, this is an economy where you're seeing some ah spillovers from the AI trends. And on top of that, the fiscal policy is still supportive for the overall economic outlook. And I guess, you know, from this time zone, from the Simea, one country that I would like to highlight is South Africa. We are already seeing quite positive, improving sentiment for the country. with the inflation target now being revised down. And from Latam region, I think Brazil it could be an interesting country. Obviously, there are still too many moving parts and elections are upcoming, but the monetary policy, there is room for monetary policy to ease further.
00:07:41
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Okay, so before we finish, we need to talk about risks to this very positive outlook. You asked that question in the sentiment survey. So firstly, what are investors worried about?
Concerns Over Recession Risks and Fiscal Health
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Well, investors are most worried it about the recession in major economies, including the US or Eurozone. And this is also followed by fiscal deterioration in developed markets, which a trend that we have seen over the course of last year. Why why is that important, that the fiscal deterioration in developed markets?
00:08:08
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Well, it has some implications. in At the end of the day, when you look at how markets are pricing, it's always a relative pricing, right? And when the developed market yields, for instance, remain at very elevated levels, it also suggests some higher bar to achieve for emerging markets. Of course. Yes, of course. So if the yields are very high, will attract capital to developed markets relative to emerging market? That's to some extent is the view and that's one of the worries out there. But apart from that, investors are also worried about the geopolitics, geopolitical developments. And so far this year has proved to be another you know interesting year in terms of the geopolitical developments. But in my personal view, I'm more worried about if we were to see an episode similar to 2018 where US economic activity was growing quite strong, but the rest of the world was sort of lagging. That led to quite the underperformance of rest of the world, including emerging markets. And if we were to see something like that, that could definitely be a negative to the
Is There an Emerging Market Renaissance?
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outlook.
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All right. So to finish, I'm going to put you on the spot. Could this favorable environment mark the early stages of a more durable EM renaissance? I mean, as I said, Piers, I think it's still too early to say that it's a structural story. It's the beginning of an EM renaissance. But in the absence of major macro triggers, the balance of risks still suggests that emerging markets is the right place.
00:09:33
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All right. Well, we'll be watching the stars. But Ali, thank you very much for joining us today. Thank you very much, Piers.
00:09:43
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A few quick notices before we
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Staying Updated and Engaging with HSBC
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Don't forget you can keep up to date on all of our latest reports and videos by downloading our app from Apple's App Store or Google Play.
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But that's it from us for now. This week's podcast was hosted by me, Piers Butler, and produced by Tom Bolton. Don't forget to like and subscribe to The Macro Brief. Thanks very much for listening, and we'll be back next week.
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Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.