Historically, investors have viewed emerging markets (EM) with caution, citing policy volatility and corporate governance as key sources of risk. Over the past decade, however, EM economies have made meaningful progress on both fronts. Disciplined monetary and fiscal management has enhanced resilience to external shocks, while improved corporate disclosure and accountability have narrowed the governance gap with developed markets.[1] The result is a stronger foundation for long-term performance.

This paper examines how these shifts are reshaping the EM investment landscape by reducing risk, deepening local markets, and broadening opportunities for long-term investors. We focus on the evolution of government policy frameworks, evidence of greater resilience, and approaches to identifying equities at a significant discount to harness alpha-generation.

Improving Policy Frameworks and the New EM Resilience

Many emerging economies have fundamentally strengthened their monetary and fiscal policy frameworks in recent years, with credible inflation targeting, prudent fiscal management, and greater central bank independence now more common. Historically, EM growth outpaced developed markets, but tended to be more volatile, often amplified by external shocks and policy missteps. Today, stronger policy credibility and institutional independence are helping to moderate that volatility and enhance resilience across cycles.

An October 2025 International Monetary Fund study notes that since the global financial crisis, emerging market economies have held up “remarkably well,” even during periods of global turmoil, thanks in part to evolving monetary and fiscal policy as well as greater central bank independence.[2] Indeed, going forward, the IMF projects robust EM growth relative to Developed Markets (DMs) as these investments in governance support continued economic expansion (see Figure 1).[3]

Figure 1. World Economic Outlook – Growth Projections

Source: International Monetary Fund

Risk-Off Episodes Become Less Risky

Emerging Markets have historically been very sensitive to global financial shocks. During past periods of heightened risk aversion—so-called “risk-off” episodes—investors often withdrew capital indiscriminately from EM assets. These outflows led to sharp currency depreciations and higher borrowing costs, as many countries carried significant dollar-denominated debt. Policymakers faced a dilemma: defending the currency by tightening monetary policy risked deepening the economic slowdown, while easing policy to support growth threatened inflation and capital flight. The result was often amplified volatility, larger output losses, and prolonged recoveries relative to developed markets.

In contrast to the 1990s, when risk-off episodes triggered sharp capital outflows, that led to plunging emerging market currencies and surging inflation, many EM countries now weather global shocks with smaller outflows, contained borrowing costs, and lower inflation.[4] Improved policy frameworks—such as credible monetary policy, more independent central banks, and more transparent fiscal policy, as cited by the IMF—played a crucial role. Comparing typical risk-off episodes before and after the global financial crisis, the IMF analysis concludes that improved policy frameworks contributed to smaller output losses and lower inflation. This resilience underscores how disciplined macroeconomic policies have reduced the vulnerability of EM sovereigns to external shocks (see Figure 2).

Figure 2. Emerging markets’ resilience to risk-off shocks after global financial crisis

Source: International Monetary Fund

So, what has changed? EM foundations have strengthened, underpinned by the adoption of flexible exchange rate regimes. Before the late 1990s, many emerging markets maintained hard pegs to developed market currencies like the US dollar, or tightly managed rates, often while liberalizing their capital accounts. That mix was inherently fragile: defending a peg while under open capital flows led to pro-cyclical interest-rate spikes, which in turn resulted in more frequent booms and busts that occasionally caused reserve losses. Whenever credibility was compromised, sudden disorderly devaluations ensued. The broad transition toward flexible exchange rates was therefore typically accompanied by inflation targeting and stronger financial frameworks, which have given EM countries greater flexibility to manage shocks without exhausting reserves or destabilizing growth. EM countries have now increasingly allowed their currencies to act as shock absorbers, rather than as channels for crisis transmission. This evolution reflects broader improvement in monetary, fiscal, and institutional frameworks across emerging markets.

Figure 3. Changes in Policy Frameworks Before and After Great Financial Crisis (GFC)

Source: International Monetary Fund

Credible inflation targeting and more independent central banks have anchored long-term inflation expectations and reduced the pass-through from exchange rate depreciation to domestic prices. Fiscal authorities, meanwhile, have become more transparent and responsive to debt-sustainability pressures, helping to contain sovereign spreads and maintain market access even during volatile periods. Together, these changes mark a decisive move away from the “fear of floating” that once constrained EM policy responses and amplified volatility.

The period surrounding the pandemic served both as a test and a catalyst for these improvements. When global inflation surged, many EM central banks responded swiftly and decisively, drawing on their deeper experience in managing inflationary pressures. Having faced past episodes of high inflation, EM policymakers were quicker to act than many of their developed-market counterparts, implementing early and forceful rate hikes to contain price pressures. This timely response reflected institutional maturity and reinforced the credibility of EM monetary authorities, demonstrating that the policy frameworks built over the past decade are now capable of maintaining stability amid global volatility. As a result, investors have driven borrowing costs for highly rated emerging market governments and companies to near their lowest levels since the global financial crisis, relative to those in developed markets.[5]

Figure 4. Investment-grade yield over US Treasuries (basis points)

Source: Financial Times

Deepening Local Currency Financing

A striking transformation in recent decades has been the shift from foreign to local currency borrowing among emerging market governments. Before the early 2000s, most EM sovereigns were constrained by “original sin”—the inability to borrow abroad in their own currency. This left them highly vulnerable to exchange-rate fluctuations and shifts in global risk sentiment. As currencies weakened during risk-off periods, debt burdens soared, leading to pro-cyclical tightening and heightened financial fragility.

That vulnerability has diminished as policy credibility and investor confidence have improved. More flexible exchange rates, credible inflation-targeting regimes, and transparent fiscal management have encouraged the development of deeper domestic bond markets. A growing share of EM sovereign debt is now denominated in local currency, supported by an expanding base of resident investors such as pension funds, insurance companies, and banks (see Figure 5).[6] This evolution has reduced currency mismatches, strengthened financial stability, and made EM sovereigns less dependent on volatile foreign capital. Countries with more developed local markets now exhibit smaller yield spikes and steadier liquidity during global risk-off episodes, according to recent IMF analysis. A risk-off shock that would raise local yields by ~19 basis points only raises them ~11 basis points with a stronger domestic investor presence. In short, local currency funding and broadening local investor bases have become effective buffers against external volatility.[7]

Figure 5. Currency composition of outstanding bonds has changed over time

Source: Bank of International Settlements

The rise of domestic ownership and local-currency financing is now a key source of resilience. By broadening the local investor base, EM governments have reduced the sensitivity of bond yields to global shocks, helping markets remain open even when risk appetite weakens. At the same time, higher domestic participation has deepened liquidity and improved monetary transmission, allowing policymakers to respond more effectively to domestic conditions. Challenges persist for smaller or lower-income economies with limited savings or narrow investor bases; however, the trend is clear: stronger policy frameworks, higher savings rates, and maturing institutions are enabling emerging markets to finance themselves more sustainably through domestic markets.

Improved Policy Factors Are Driving Greater EM Resilience

Specific policy determinants have become key drivers of financial resilience across Emerging Markets. Credible monetary and fiscal policies, flexible exchange rates, and transparent governance have translated into lower sovereign risk, steadier credit ratings, and narrower spreads—all indicators of improving market confidence. Indeed, countries with robust frameworks have seen their bond yields remain comparatively stable even amidst recent global volatility.[8]

In these increasingly stable environments, corporate capital expansion is more likely, driving GDP and employment growth. Evidence from a recent IMF study reinforces this connection. The study reports that improved policies contributed approximately 0.5% to EM growth and reduced inflation by 0.6% compared to the period before the 2008 financial crisis. These results suggest that stronger policies are associated with improved performance. For example, an emerging market that entered a risk-off episode with lower foreign-exchange mismatches (75th percentile) is expected to experience 1.3% higher growth than one with weaker balance sheets (25th percentile) (see Figure 6).

Figure 6. Factors contributing to Emerging Markets’ Resilience during Risk-Off Episodes

Source: International Monetary Fund

Improvements in Corporate Governance

At the sovereign level, credible policy frameworks reduce risk premia and attract longer-term capital. As with sovereign governance, corporate governance in emerging markets (EM) has also generally improved, with policies providing increasingly constructive regulatory guidance. At the corporate level, improving governance, transparency, and capital discipline are enabling investors to identify mispriced equities where governance quality is not yet fully reflected in valuations. Examples of improvements in corporate governance include Korea’s Value-Up initiatives, China’s market-value management push, and Brazil’s ISSB-aligned reporting, which are representative of the practical levers moving the EM needle.[9]

Leveraging Governance for Alpha and Risk Management

Despite significant advancements in macroeconomic policy and corporate governance in emerging markets, a risk discount persists. The ability to differentiate between good and not-so-good investments at the country and company levels allows for outperformance.[16] A successful Emerging Markets investment strategy seeks to overweight markets with strong policy momentum and undervalued governance improvements, while avoiding or underweighting those with frail institutions or looming macro risks. Robust investment risk analysis is critical in helping investors identify and capitalize on the discount in emerging markets and developing economies (EMDEs), which remain underrepresented in global investment portfolios (see Figure 7).[17] This underrepresentation also extends to EM debt: The Financial Times recently reported that 43% of institutional investors still did not own emerging market bonds; however, four-fifths of those who did planned to maintain or increase their exposure in the next 18 months.”[18]

Figure 7. EMDEs remain heavily underrepresented in global investment portfolios relative to their share in the global economy

Source: Institute of International Finance, International Monetary Fund

The Role of Shareholder Engagement in EM

Engaging with EM companies, for instance, by advocating for improved disclosure, board independence, or climate action targets, can help enhance resilience and investment outcomes. In our experience, while many EM companies begin at a valuation discount, they are increasingly open to engagement and motivated to strengthen governance standards to attract long-term capital. As reforms are implemented and disclosure improves, market perceptions shift, and valuations tend to converge upward, creating an identifiable rerating pathway for active investors. At both the corporate and sovereign levels, advocating for reforms that foster long-term stability, from preserving central bank independence and fiscal prudence to adopting best-in-class corporate practices, can help sustain ongoing improvements in EM governance and corresponding benefits for EM investors.

Outlook: Improving EM Governance Delivers Growth & Resilience

The evolution of policy frameworks and governance in emerging markets has altered the EM investment proposition. Disciplined fiscal and monetary management has reduced sovereign risk, deepened local markets, and strengthened investor confidence. Oftentimes undervalued, many EM companies now rival developed-market peers in transparency, accountability, and strategic foresight. These shifts have already yielded tangible results, including enhanced resilience during global shocks, lower volatility, and improved economic and investment performance.

For investors, recognizing and harnessing these trends creates the potential for superior risk-adjusted returns while reinforcing the virtuous cycle of strong governance and capital investment. The progress of the past decade gives us confidence that emerging markets will continue to mature, delivering both growth and resilience. Along the way, the once outsized risks of EM investing should continue to decrease, providing meaningful investable discounts while benefiting global portfolios and improving sustainability in the communities these markets encompass.

[1] Better policies, deeper markets help emerging economies weather shocks, says IMF | October 2025, Reuters

[2] Good Policies (and Good Luck) Helped Emerging Economies Better Resist Shocks | October 2025, IMF

[3] Global Economy in Flux, Prospects Remain Dim | October 2025, IMF

[4] Emerging Market Resilience: Good Luck or Good Policies? | October 2025, IMF

[5] Emerging market borrowing premium over US falls to nearly lowest since 2007 | July 2025, FT

[6] International finance through the lens of BIS statistics: bond markets, domestic and international | September 2025, BIS

[7] Good Policies (and Good Luck) Helped Emerging Economies Better Resist Shocks | October 2025, IMF

[8] Better policies, deeper markets help emerging economies weather shocks, says IMF | October 2025, Reuters

[9] Corporate Governance Watch 2023 | December 2023, CLSA & ACGA

[10] South Korea’s AI chip investor announces plan for share buybacks | November 2024, Reuters

[11] KRX Finalizes Guidelines for Corporate Value-Up Plans | June 2024, Kim & Chang

[12] Dividend surge signals culture shift in China’s markets | January 2024, Reuters

[13] Board’s new mandate in China: managing market value | November 2024, ACGA

[14] CVM & CDP Press Release | September 2024, CDP

[15] Brazil to mandate ISSB standards from 2026 | October 2023, Corporate Disclosures

[16] EM portfolios see second biggest monthly inflow in four years, IIF data shows | August 2025, Reuters

[17] 2025 IIF Investor Relations and Debt Transparence Report | July 2025, IIF

[18] Emerging market borrowing premium over US falls to nearly lowest since 2007 | July 2025, FT