By JBizNews Desk
For the first time in more than a decade, the assets Wall Street spent years avoiding are suddenly outperforming the markets investors once viewed as untouchable.
That is the conclusion of a new report published May 15 by UBS Asset Management, where Shamaila Khan, Head of Emerging Markets and Asia Pacific Fixed Income, argues that emerging-market debt and equities may have entered a fundamentally different investment era — one in which developing economies act less like financial weak points and more like stabilizers during periods of global stress.
The report, co-authored by Massimiliano Castelli, Philipp Salman, and Sangram Jadhav, points to a major shift in investor behavior during the recent Iran-related market shock. Instead of fleeing emerging markets as geopolitical tensions escalated across the Middle East, investors largely stayed put. In several cases, emerging-market debt outperformed developed-market credit.
That reversal matters because for years the rule across global finance was simple: when geopolitical risk rises, emerging markets get hit first and hardest. UBS argues that dynamic is now changing.
The data behind the call is notable. According to the report, emerging-market assets outperformed advanced economies in 2025 for the first time in years. During the spring 2026 Middle East conflict, hard-currency sovereign and corporate bonds from emerging economies traded relatively smoothly, avoiding the panic-driven selloffs that historically accompanied regional wars or oil shocks.
UBS says many emerging-market governments and companies entered the turmoil in unusually strong financial condition. Countries had built foreign-exchange reserves, reduced refinancing pressure, and pre-funded large portions of their borrowing needs before volatility accelerated. In practical terms, they did not need to dump bonds into distressed markets to raise cash.
Investor flows reinforced the picture. The report cites JPMorgan data showing $17.4 billion in year-to-date inflows into emerging-market debt. While March 2026 saw roughly $1.7 billion in outflows during the peak of market anxiety, UBS noted that much of the selling came from passive exchange-traded funds, while actively managed funds with stronger performance records continued attracting capital.
Emerging-market equities showed similar resilience. Through the March-April Iran shock, developing-market stocks avoided the sweeping selloff patterns investors typically associate with Middle East instability, preserving gains and containing volatility despite rising oil prices and fears of wider regional escalation.
The next phase of the UBS thesis centers on the U.S. dollar.
After years of strength, UBS argues the dollar now appears historically stretched at the same time Washington faces worsening fiscal pressures and narrowing interest-rate differentials with overseas economies. A weaker or even stabilizing dollar would materially improve returns for emerging-market investors because local currencies and bonds become more valuable when converted back into dollars.
Historically, broad periods of dollar weakness have been among the strongest drivers of emerging-market performance across both equities and debt.
The longer-term performance gap helps explain why UBS believes the shift could still be in its early stages. From January 2010 through December 2025, the S&P 500 generated average annual returns of 14.5%, while MSCI Emerging Markets equities returned just 3.9% annually. That disparity fueled one of the largest sustained allocations into U.S. equities in modern investing history.
UBS now believes that imbalance may begin reversing.
The firm argues the risk-adjusted numbers already support the case. Using data from 2003 through 2025, emerging-market corporate hard-currency debt produced a Sharpe ratio of 1.16, outperforming both global corporate bonds and the broader Global Aggregate index on a return-per-unit-of-risk basis.
Despite that, institutional exposure remains limited. Public pension systems maintain average emerging-market allocations near 5%, well below the roughly 11% weighting emerging markets represent in the MSCI ACWI benchmark. Allocations to emerging-market debt are often even smaller, typically between 1% and 3% of portfolios.
That under-allocation is central to UBS’ argument. Emerging markets now account for more than 60% of global GDP on a purchasing-power basis, yet remain structurally underrepresented in many institutional portfolios.
UBS projects emerging-market sovereign dollar debt could generate returns above 5.5% annually over the next seven years, while corporate debt could return roughly 6.1%, with materially lower volatility than the S&P 500’s projected long-term return profile.
For Khan and her co-authors, the shift is no longer simply about chasing higher yields. It is about a growing realization across global finance that the world’s fastest-growing economies may finally begin receiving portfolio allocations that better reflect their actual role in the global economy.
Middle East — JBizNews Desk
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