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CONTRIBUTORS

Stephen Dover, CFA

Chief Market Strategist,
Head of Franklin Templeton Institute

ONE Franklin Templeton

Diverse expertise, unified purpose

Franklin Templeton offers a broad range of investment capabilities spanning asset classes, geographies and investment disciplines. Across the firm, specialized investment teams contribute distinct perspectives shaped by deep research, market experience and independent investment approaches.

The contributors featured in this paper reflect the breadth of expertise across the Franklin Templeton investment organization. Together, they offer insights informed by different disciplines, regional perspectives and sector specializations, providing a broader lens through which to examine today’s investment landscape.

By bringing together a range of viewpoints, this paper reflects the value of diverse perspectives in exploring complex investment themes and fostering a more comprehensive understanding of the opportunities and risks shaping global markets.

Executive summary

This paper presents the case for emerging market (EM) allocations within the broader context of global investment strategy. In a period of heightened geopolitical complexity—spanning the 2026 US-Iran conflict, challenges to globalization, political transformation and ongoing great power competition—we believe the case for engaged emerging markets exposure has never been stronger.

The global investment landscape has fundamentally shifted. The unipolar order that defined the post-Cold-War era has given way to a multipolar environment characterized by regional conflict, divergent policy objectives and fragmented global trade. For institutional investors, complexity creates challenge and opportunity. As we outline below, emerging markets offer avenues to enhance returns, diversify portfolios and help institutional investors meet their objectives.

Three converging and reinforcing forces are propelling a fresh approach to emerging markets:

  • Structural transformation: Many emerging markets have adopted sound institutional reforms, creating more viable and resilient monetary and fiscal policy frameworks.
  • Economic dynamism: Many emerging markets have diversified their economies and have demonstrated an ability to adapt to rapidly changing geopolitical dynamics, including to tariffs and other impediments to globalization. Emerging markets have come a long way from their more crisis-prone and globalization dependent origins of the 1980s and 1990s.
  • Changing US dollar outlook: For a variety of reasons, an era of unassailable US dollar strength is transitioning to one of a stable-to-weaker dollar. Narrowing interest differentials and a broadening of investment opportunities worldwide are part of that dynamic, as are signs that a more multi-polar currency system for payments, reserves and finance is arriving. Emerging markets—debt and equity—generally perform well during periods of dollar stability or even weakness.

For investors, other considerations are also important, including:

  • Earnings and valuation support: Corporate profits growth in emerging equity markets is expected to improve significantly over the next two years, which should help to “unlock” lower valuations and therefore improve returns in both emerging equity and corporate credit markets.
  • Income opportunities: In developed markets (DMs), nominal and real yields remain relatively low, yield curves are historically flat (reducing the attractiveness of duration) and credit spreads are tight. In contrast, parts of the emerging market complex (such as large parts of Latin America and Brazil in particular), offer higher real interest rates and, overall, local currency debt is supported by dollar weakness.
  • Enhanced portfolio diversification: Driven by improved returns, as well as contributions from correlation and volatility, emerging debt and equity markets can provide diversification opportunities in global portfolios.

Capturing opportunities in emerging markets requires strategies that maintain flexibility across implementation approaches, including active security selection and discretionary tactical allocation. Investors must be able to identify and realize opportunities at the security level, but they must also be equipped to respond to and manage rapid shifts in risk, including geopolitical risk, via tactical reallocation across regions, sectors and asset classes.

This paper establishes the strategic rationale for emerging markets. We examine structural transformations across three pillars—re-globalization, technological disruption and institutional resilience—and then detail investment opportunities by region and asset class. We also consider how emerging markets are likely to impact portfolio returns and risk.

The call to action

Institutions seeking genuine diversification and superior returns are shifting their attention to international opportunities, above all in emerging markets. Performance is improved, driven by economic resilience, rapid adaptation, orthodox policy, rising earnings, compelling valuations, and attractive yields.

The geopolitical backdrop is characterized by regional conflicts, great power competition and policy divergence. It demands dynamic portfolio management. Markets will reward investors who distinguish between transitory disruptions, cyclical movements and structural transformation and are able to implement those views across regions and sectors based on fundamental analysis. Opportunity is emerging, and is there for the taking.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. To the extent a strategy invests in companies in a specific country or region, it may experience greater volatility than a strategy that is more broadly diversified geographically.

Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

Investing in privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.

Active management does not ensure gains or protect against market declines. Diversification does not guarantee a profit or protect against a loss.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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