Offside or Opportunity? Scouting Emerging Markets’ Next Stars

Are emerging markets entering a new era of opportunity? In this IBKR Podcast episode , Malcolm Dorson of Global X breaks down the countries, sectors, and investment themes that could become the next stars of the emerging markets universe, from India and Latin America to opportunities beyond China.

Summary – IBKR Podcasts Ep. 405

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this week’s podcast. I’m Andrew Wilkinson at Interactive Brokers. Joining me today is Malcolm Dorson. He’s Senior Vice President and Head of Active Investment Team and a senior emerging markets portfolio manager at Global X in New York. Welcome, Malcolm. 

Malcolm Dorson

Thank you, Andrew. 

Andrew Wilkinson

Well, we’re in the middle of the World Cup, and what we’re learning is that you don’t have to be a big team, a major nation, to have success, and that’s kind of a nice little opener into the theme of emerging markets. Would you agree? 

Malcolm Dorson

Absolutely. I think it’s something that sometimes is lost in the index. You know, historically, China representing roughly 30% of the index, and other countries these days where you find a lot of concentration kind of makes people overlook some of the less covered, smaller jewels within the asset class. 

Andrew Wilkinson

Now, you’ve just released recently, this week, your Global X Emerging Markets Outlook, and it’s quite a positive read. EM, emerging markets, has been out of favor for quite a long time, and I think it’s fair to say that many investors would be surprised to see the strong recent performance of emerging markets versus the S- the S&P 500 over the past two years. What, in your opinion, has changed? 

Malcolm Dorson

It’s a great question, Andrew, and you’re spot on. I think a lot of people, you know, despite emerging markets doing quite well over the past two years, the S&P continues to chug along, and that continues to drive this trend of strong positioning in the US, in the S&P, with massive underweights in international and emerging markets. 

So what’s been driving the strong performance? You know, EM outperforming the S&P by 14 percentage points this year, over 20% over the past 12 months, over 26% over the past two years. What’s been driving it is a combination of positioning meeting uncertainty. So, in terms of positioning coming into this year, most advisors that we spoke with had a roughly 2 to 5% exposure to emerging markets, compared to 12 and a half or 12.7% exposure as translated through the MSCI All Country World Index. 

So you take that lack of positioning, or massive underweight in emerging markets, and combine it with the uncertainty people were feeling in geopolitics, in terms of tariffs, in terms of domestic politics, US fiscal policy, US monetary policy, the direction of the dollar. I can really go on. And people weren’t necessarily saying, “I have to go overweight emerging markets,” but they were certainly saying, “I need to get closer to equal weight.” And in order to do that, most advisors had to double their exposure, in some cases triple their exposure, which is really meaningful for flows. And if you kind of take a step back as well and start looking at it from a more fundamental perspective, people started doing a bit of homework and realized that you have a much healthier backdrop for emerging markets than you’ve seen over the past decade. 

So you’ve seen improved fiscal and current account balances across the board, more and more autonomous central banks making prudent decisions to control inflation. And it’s also not just a China story anymore. It’s a technology story in North Asia. It’s political reform in Latin America, along with a massive commodities base, which is incrementally more important. 

It’s economic pivots in the Middle East. It’s value in Eastern Europe and a whole lot more. So I think people take that and combine it with a 42% discount to the S&P, a potentially weaker US dollar, and people are saying, “I just need to cover that underweight,” which is leading to more flows. 

Andrew Wilkinson

You, that’s a really kind of, not simplistic, you boil it down really nicely for the audience into positioning, valuations, dollar liquidity. Does that then just leave the decision to just go buy the index, go and buy the emerging markets index? 

Malcolm Dorson

So I wish I could say yes, ’cause it’d be a whole lot easier, but the index has some issues with it. You know, I mentioned historically, or in the past, when China represented 30, 35%, and that was kind of on paper, but China was even more of a story because China was driving Latin America and other parts of the world. So that, that kind of gave you that concentration risk. Today you still have concentration risk, but it’s in other parts. So China still represents roughly 20% of the index, but broadly, it’s- This is an Asia index now. This is 80% plus Asia. It’s over 30% in just three names, which are concentrated in semiconductors if you look at Taiwan Semiconductor, SK Hynix, and Samsung. And it’s getting more and more correlated to the tech trade that most US investors already hold. So, kind of going back to the beginning of our conversation, EM still definitely offers diversification, but I think you need to do so a little, in a bit of a more sophisticated manner, a bit more actively to find it. So that means binding, finding individual countries or regional funds, or i- aligning with an active manager can kind of do that for you and ensure you’re approaching the asset class in a sort of risk aware and more balanced manner. 

Andrew Wilkinson

In light of this being peak World Cup season, you frame your outlook in the same way that a soccer coach might draft his team. But the first thing I’m noticing is that Korea and Taiwan didn’t make the team. What happened? 

Malcolm Dorson

Yeah. I am still, you know, keeping in athletic and sports terms still fans of Korea and Taiwan, but these countries have knocked it out of the park over the past couple of years. I mean, Korea’s up 215%, Taiwan’s up 106% over the past 12 months alone. So the issue really is concentration, not quality. And the point is that when you’re writing an outlook, adding Korea and Taiwan to this quote-unquote roster, I don’t think it gives the reader or the audience or any really differentiated value. I think most people already own that trade by default through other AI ecosystem or semiconductor trades. And from an emerging markets perspective, we want to let you know what most people aren’t thinking about and show value in other opportunities. 

Andrew Wilkinson

So beyond that, walk us through how you think about positions and tell us about three or four of your star players. 

Malcolm Dorson

Sure. So we divided this up, you know, in World Cup fashion by strikers, midfielders, defense, and goaltender. So in terms of strikers, we are looking for countries or opportunities within EM that offer high upside, near-term catalyst, and momentum. And then in terms of midfielders, an opportunity that could be more versatile core long-term allocations that have both qualities in terms of structural growth, but also defensive attributes as well. And then moving over to defense, here we’re looking for compounders, margin of safety from a valuation perspective, structural tailwinds, and income. And then in terms of goalie, we are looking for, you know, nothing as a backstop, but something as close as we could get to it. You know, low volatility, income, downside protection. 

So across the board, 11 players, 11 unique opportunities. We hope that it’s an interesting read that can add value to the audience. But in terms of singling out a few, I guess I think I would start out with India because I think India is gonna be your comeback player of the tournament. Past couple of years, India’s massively underperformed emerging markets. First because of 2025, it had main headlines in terms of tariffs with the current US administration threatening a 50% tariff against India. Ultimately got to a deal where the effective rate was gonna be 17%, much better than other Asian peers that had negotiated other rates in terms of an effective tariff rate. 

But just as that happened, that conversation got put aside as the Supreme Court intervened, and then focus moved towards geopolitical tensions in the Middle East, which of course spiked energy prices through the roof. And India imports over 92% of its oil needs. So that was kind of the second headwind for India, which led to a second year of challenges. 

In the meantime, India’s growing GDP over 7% per year. It’s being led by Prime Minister Modi and the BJP, which have been massively market friendly in terms of market reforms. And we still see this as the best demographic dividend story in emerging markets, if not the world. So we think this is a really interesting opportunity to step in at a valuation that’s trading at roughly one standard deviation below its historical average. Rare to ever find India on the cheap. And now if energy prices continue to fall, that could be a major catalyst for India to rebound. So we’re excited about that opportunity. So that’s a midfielder. I guess the other midfielder we would mention is emerging markets ex China. I think this is your center midfielder, your number 10. This is where you get the Latin America trade, the structural demographic dividend story in Southeast Asia, the tech trade in North Asia and Korea and Taiwan. And if you do so actively, you can kind of be in the right place at the right time. 

So we love that opportunity. And then the exciting part, moving into offense. So we identified a few strikers here, starting out with Argentina. Argentina isn’t even classified emerging markets. This is a standalone market that we believe will be moved back into emerging markets index by MSCI within a couple of years, which could lead into billions and billions of dollars of inflows. 

But what’s gonna get us there, it’s political change that started two years ago when President Milei was elected after decades and decades of socialist rules leading to over five sovereign defaults during roughly 50 years. So in Milei’s first two years, he delivered the first fiscal surplus for the country in almost 15 years. Monthly inflation dropped from roughly over 30% to under 3% a month, and GDP growth swung from negative 4% to positive 3% or 4%. So you saw some really significant change. He did very well in a decisive midterm win in October of last year in 2025. So we think the momentum is with him and these reforms should continue. Banks are very well capitalized. There’s an enormous credit runway. Credit penetration is only 13% of GDP, and we think this is the right administration to unlock potential value in the commodity trade in Argentina as well. The other striker that we mentioned is Colombia. Colombia just had an election on June 21st, so we’re fresh out of it, and we see a lot of parallels to the Argentina trade here. 

The political pendulum, as we see in a lot of Latin America, swinging from the far left to the more center right. The current or the president-elect, his plan is to reverse the oil exploration moratorium, restore investor-friendly arbitration rules, and end the prior government’s, quote-unquote, “Total Peace” policy. He’s already started with his kind of surrounding himself with market-friendly, prudent people. His vice president pick is a former finance minister, and this market trades just over eight times earnings with an almost 19% ROE, 6% dividend yield. We think it’s cheap. We think it has a strong political reform story, and it’s also interesting, could be seen as a Venezuela proxy. 

Colombia shares a 1,400-mile border with Venezuela. It used to be its largest trading partner. And as you start seeing any sort of economic reforms out of Venezuela, Colombia should be the main beneficiary. So I know I’m saying a lot here, but we think that these four players stand out and emerging markets are set up to do well, not just this year in terms of thinking of it as a tournament, but we think this team could be a dynasty. 

Andrew Wilkinson

Who’s the Cape Verde?

Malcolm Dorson

Interesting. Who could stand out? Well, I will keep it to a Portuguese-speaking country. I think it’s gonna be Brazil. You know, Brazil is a smaller country. Excuse me, not as small as Cape Verde, of course. It’s a larger country. But I think a lot of people are writing Brazil off because of the political story and the political headlines between Lula and Bolsonaro. But the main story is that Brazil has positive 10% real rates. Inflation is below 5%. Its overnight key rate is around 14% now. So the central bank is in a strong position to continue its rate-cutting cycle that has just begun a couple of months ago. And looking at the past seven rate-cut completed cycles in Brazil, when that market rallied during a rate-cutting cycle, MSCI Brazil rallied roughly 97% cumulative on average, and that’s against a 15% drawdown when that market fell. 

So we think the risk-reward profile looks really attractive, and we think the election is a bit of a coin toss at the moment. The valuations look really attractive, and, you know, from an allocator’s perspective, we think Brazil can also represent the other end of the barbell in terms of the AI trade. People are looking for balance, and they’re probably looking for value, they’re looking for liquidity, they’re looking for commodity exposure, financials exposure, and Brazil gives you all of that. So I think it’s an interesting place to do some diligence. 

Andrew Wilkinson

You mentioned valuation there. What about here in the US, the market again at all-time highs? You comfortable with that? 

Malcolm Dorson

Well, as long as earnings keep chugging along, and it seems that that is going to happen. I mean, you know, the CapEx that we see from these hyperscalers continue to spread out through players within the AI ecosystem. We see commodity companies benefiting, we see real estate companies benefiting, and we think that the trade is going to spread out more into mid caps and small caps as well. 

So that’s healthy if it’s not just stuck within the concentrated list of names that have been performing well recently. So any sort of corrections we see as healthy. But, you know, that sort of falls in line with the story that people are looking for diversification, whether it means avoiding just U.S. large caps and moving into small caps and mid caps, or if it means moving more internationally and getting some benefits if we see a weaker dollar environment because of a larger U.S. fiscal deficit. 

Andrew Wilkinson

Brilliant. Malcolm, you live in a fantastic world that I haven’t looked at for quite some time. So thank you for taking the time to explain that to us. And I do hope you’ll come back and talk about some individual countries more at a later date. 

Malcolm Dorson

We’d love to. Thank you so much, Andrew. Appreciate it. 

Andrew Wilkinson

Thank you. Malcolm Dorson is a senior emerging markets portfolio manager at Global X. He’s also SVP and head of the active investment team. And we’ll make it… Before you go, Malcolm, tell us where we can download the—well, I’ll tell you what we’re gonna do. We’re gonna put a link to your latest emerging markets paper in the show notes. But where can they find it outside of the podcast? 

Malcolm Dorson

Perfect. Please take a look at our material at globalxetfs.com. 

Andrew Wilkinson

Brilliant. Lovely. Fantastic guest. Thank you very much indeed. And to the audience, thanks for taking time to listen to today’s episode. And if you like what you hear, don’t forget, subscribe wherever you download your podcasts from. Bye for now.