After years of uneven performance, both emerging market ( EM ) equities and fixed income are regaining momentum heading into 2026. Despite recent pressures from US tariffs, the EM market has found renewed strength from resilient domestic demand, disciplined fiscal management, and growing independence from the US Federal Reserve’s policy cycle.

At BNP Paribas Asset Management’s ( BNPP AM ) 2026 APAC Investment Outlook briefing ( held Nov 12 ), portfolio managers highlighted a sharp divergence between emerging and developed markets.

Basically, BNP Paribas is saying that the 14-year supremacy of developed markets is over and emerging markets are about to take the pole position in global equity and fixed income returns. And this time, Asia’s AI supply chain + policy freedom makes the rally structural, not cyclical.

“Emerging economies have been delivering stronger, consumption-led growth underpinned by consistently disciplined policy,” shares Alaa Bushehri, head of emerging markets fixed income and EM corporates at BNPP AM.

That fiscal prudence, maintained even through election cycles, has allowed many EM central banks to cut rates ahead of the Fed without destabilizing currencies or inflation expectations.

Emerging market bonds are still offering investors an edge, even as spreads remain tight across global credit and EM debt provides a meaningful pickup over developed-market yields.

Strong fundamentals

BNPP AM remains “high conviction” on local bonds, expecting further support from easing cycles, stable inflation, and a range-bound dollar.

“We’re structurally positive on EM rates and tactically positive on EM FX,” Bushehri says, noting that fundamentals remain strong and most EMs have already executed much of their monetary easing in 2025.

Bushehri suggests that the outlook for EM fixed income is even brighter than that for equities, noting that EM local bonds ( GBI-EM GD ) returned +12.4% YTD in USD terms through October 2025, their best year since 2009.

The average EM policy rate is at ~6.8% nominal vs ~3.9% for G10 ( developed market ). Real yields are still below 4% in Brazil, Mexico, Indonesia, and South Africa.

In Asia, central banks in the Philippines, Indonesia, Thailand, South Korea, China, and India have cut rates as of September 2025, ahead of the Fed, indicating their growing independence from the US monetary policy.

Previously, Asian central banks’ monetary policy was chained to the Fed because they were leveraged to the hilt in US dollars, flooded with hot money, and terrified of imported inflation. The years 2022–2024 were considered the “great cleansing” when defaults, deleveraging, hot-money exodus, and reserve rebuilding burned away the vulnerabilities.

By 2025, the Asian central banks finally had the fiscal space, balance-sheet health, and domestic investor base to move to a Fed-independent monetary policy.

Earnings outperformance

On the equity side, emerging markets are once again outperforming their developed-market peers, which is a sharp turnaround from just two years ago. Corporate earnings across Asia and other emerging markets are now growing at or above US levels, with Taiwan and South Korea leading the charge thanks to surging demand in semiconductors and AI-related technology.

“Earnings upgrades are finally coming through, and valuations remain attractive,” says Zhikai Chen, head of Asia and global emerging markets at BNPP AM. “EM equities are still trading at a discount to US markets, but with improving earnings momentum, there’s room for re-rating.”

BNPP AM’s core thesis is now a consensus among smart money, institutional investors, and high-net-worth investors, based on market data. Since April, EM equities have outperformed developed-market equities by ~18% ( MSCI EM +24% vs MSCI World +6% as of November 2025 ), the widest margin since 2009.

Investor sentiment has also been switching from developed markets to emerging markets as illustrated by the steep sell-off earlier this year. About US$40 billion has flowed back into EM equities since April, signalling renewed institutional interest, says Chen.

Chen’s position is supported by EPFR data ( provided by EPFR Global, a firm that tracks money movement in the global financial markets ), which show that US$42.3 billion into EM equity funds since April.

The “great rotation” out of US mega-cap tech stocks into North Asia/China is happening, based on the performance of Asian stock indices ( China CSI 300 +31% outperformance from April lows, Korea KOSPI +28%, Taiwan Taiex +35% vs Nasdaq +9% during the same period. )

Structural changes

Investors are also switching away from India and back into North Asia, especially China, where policy stabilization and better corporate results have improved investor confidence.

Beyond the near-term recovery, the fund managers pointed to deeper structural changes reshaping EMs. Countries like Indonesia, for example, are moving up the value chain, from exporting raw materials to refined and higher-value goods, as global trade adapts to a post-WTO, tariff-driven world.

BNP Paribas AM remains focused on selective opportunities, particularly in IT, communications, and energy-transition-linked sectors, while keeping country exposures tight amid geopolitical uncertainty.

Despite the debate over whether the AI trade has become overheated, the firm sees Asia as a clear winner. “You can’t have an AI revolution without Asia,” Chen says, noting that nearly 90% of AI hardware production takes place in the region.

For investors, that convergence of disciplined policy, stable macro fundamentals, and rising earnings momentum suggests one message: after a long lull, emerging markets may once again be ready to lead.