SINGAPORE (Sept 24): One truism of the last three decades is that emerging markets (EMs) are a leveraged play on global growth: They outperform when developed economies are growing, but they are susceptible to sharp downturns when global conditions are less favourable. This more or less remains true. But when considering EM investment opportunities in the years ahead, one must also understand the changes that have followed developed-market financial crises and a larger shift in the geopolitical landscape.

On one hand, many emerging economies have become more resilient and are no longer simply riding on developed markets’ coat-tails. On the other hand, juxtaposed against these positive developments are a fresh set of challenges, namely increasingly pro-cyclical liquidity provision by market makers, the rise of populism, and a temptation to rely on currency depreciation as a substitute for structural reforms.

In the light of these new realities, the sell­off of EM assets this year actually means that value and risks are better aligned. To be sure, the many risks facing EMs still call for a highly differentiated stance, as market illiquidity can magnify the impact of shocks on prices. Yet, in addition to higher yields, three secular trends underpin the case for investing in EMs across global business cycles.

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