MSCI Emerging Markets forward P/E
~13x
89%
Forecast EM EPS growth over the next two years
5.2%
Average global investor allocation to EM
~80%
Typical institutional USD currency exposure
High
Real yields in select EM local bond markets
The Broader Allocation Case
Five Reasons Institutions Are Revisiting International Allocations
Five portfolio considerations from the paper, presented side by side for faster institutional scanning.
1. Global Capital Rotation Demands More Dynamic Allocations
Capital is increasingly rotating across regions, asset classes and currencies based on relative opportunity rather than broad risk-on or risk-off sentiment.
2. Policy Divergence Favors Active Flexibility
As central banks and fiscal authorities move along different paths, managers can adjust regional, sector and currency exposure as fundamentals evolve.
3. Under-Allocation has Increased US Concentration Risk
Many institutional portfolios remain under-allocated to international and emerging markets, creating concentration risk and potential opportunity.
4. US Dollar Dependence May bе an Unintended Risk
Extended US asset outperformance has increased implicit dollar exposure in many portfolios, magnifying vulnerability to US-specific shocks.
5. Active International Exposure Cаn Strengthen Resilience
Active strategies can combine security selection, regional allocation and currency management to broaden return drivers and manage risk.
Maintaining current allocations is an active decision. In a world of narrower market leadership and greater global divergence, emerging markets merit a more deliberate role in the institutional allocation conversation.”
Timothy Quagliarelleo
Head of US Institutional Sales,
Franklin Templeton
Why This Matters Now
A Broader Portfolio-Construction Question
Many institutional portfolios have become increasingly concentrated in US equities, a small number of mega-cap stocks and US-dollar denominated assets.
At the same time, valuation dispersion, policy divergence and global trade realignment are creating opportunities beyond traditional developed market allocations. Emerging markets may offer a potential source of diversification, income and long-term capital appreciation.
US-Centric Portfolios Are Carrying More Concentrated Exposures
Market leadership and benchmark composition can leave institutional allocations reliant on a narrower set of return drivers.
Global Policy Paths Are Becoming Less Synchronized
Diverging monetary and fiscal conditions can create different opportunity sets across regions, rates and currencies.
Select EM Equity Markets Continue to Trade at Relative Discounts
Valuation dispersion may create room for more selective international and emerging market exposure.
The Earnings Backdrop is Beginning to Improve
Improving fundamentals may help broaden the case beyond valuation alone and support a more durable allocation discussion.
Select Emerging Economies Continue to Offer Higher Real Yields
Local debt markets can provide a differentiated source of income, subject to country selection and currency risk.
More Currencies, Sectors and Growth Drivers Are Available Outside the US
A broader opportunity set can introduce return drivers that respond differently across economic and market cycles.
Core Thesis
A Structural Transformation, Not a Cyclical Trade
Emerging markets are undergoing a profound transformation that is structural, durable and increasingly self-reinforcing.
The traditional narrative of emerging markets as externally dependent and volatility-prone is being reshaped by stronger institutions, more diversified economies, deeper local capital markets and a more multipolar global trade system.
| What Has Changed | |
|---|---|
 |
Many emerging economies are more institutionally resilient than in prior decades. |
|
Monetary and fiscal frameworks have improved across many markets. |
|
Local capital markets are deeper and more diversified. |
|
Re-globalization is creating new supply-chain and infrastructure beneficiaries. |
|
Earnings growth is improving while valuations still reflect investor caution. |
The opportunity in emerging markets lies in their inefficiency: Diverse economies, uneven capital access and misunderstood fundamentals create fertile ground for disciplined, active investment.”
Nicholas Hardingham, CFA
Director of Emerging Market Debt,
Franklin Templeton Fixed Income
Opportunity Set
The Equity and Debt Opportunities
The opportunity is selective rather than uniform, with distinct implementation considerations across public equity, sovereign debt, corporate credit and currencies.
Emerging Market Debt
EM debt may offer attractive income and diversification opportunities as select economies benefit from improved sovereign fundamentals, higher real yields and deeper local currency markets. Active country selection remains critical given meaningful dispersion.
- Real yields
- Sovereign improvement
- Local currency debt
- Corporate credit
- Currency diversification
Emerging Market Equities
EM equities today reflect improving fundamentals, discounted valuations relative to US equities, reduced realized risk and persistent under-ownership. The case is not a blanket expectation of superior returns, but differentiated exposure to global growth, innovation and domestic consumption.
- Earnings inflection
- Valuation discount
- Narrowing volatility gap
- Under-allocation
- Active security selection
We view emerging market debt as a fundamentally-driven opportunity set where disciplined country selection and a long-term horizon can uncover value that markets often misprice.”
Michael Hasenstab, Ph.D.
Portfolio Manager, Chief Investment Officer
Templeton Global Macro
Stock prices follow earnings, and earnings are growing faster in emerging markets. If faster GDP growth translates into faster EPS growth, we will have another multi-year period of EM outperformance.”
Brian Freiwald
Portfolio Manager
Putnam Emerging Markets Equity
Bottom Line
The Investment Thesis in Sum
Broaden the Opportunity Set
International allocations may help address concentrated exposures and access complementary growth drivers.
Recognize Structural Change
Nearshoring, innovation and institutional strengthening are creating differentiated outcomes.
Reassess Resilience
Improved frameworks, deeper local markets and diversified economies are changing the risk picture.
Stay Selective
Active management remains critical because outcomes vary across countries, sectors, currencies and issuers.
Relying on global portfolios can mean narrow emerging market exposure, concentrated in megacaps. A dedicated EM allocation opens the door to broader growth opportunities.”
Andrew Ness
Portfolio Manager,
Templeton Global Emerging Markets
Take the Full Allocation Framework with You
Download Expanding Global Opportunities for the complete case for international and emerging markets allocation, or continue with the webcast.
One Franklin Templeton
Diverse Expertise. Unified Perspective.
This research brings together perspectives from across Franklin Templeton's global investment platform, spanning macro research, equity, fixed income and institutional portfolio implementation
Robert Abad
Senior Client Portfolio Manager
Western Asset
Mark Cho, CFA
Head of Client Portfolio Management
Templeton Global Investments
Brian Freiwald, CFA
Portfolio Manager
Putnam Investments
Nicholas Hardingham, CFA
Director of Emerging Market Debt
Franklin Templeton Fixed Income
Michael Hasenstab, Ph.D
Portfolio Manager, Chief Investment Officer
Templeton Global Macro
Larry Hatheway
Head of Research
Franklin Templeton Institute
Jen Merner
Client Portfolio Manager
Templeton Global Investments
Tom Meyers, CFA
Head of US Institutional
Franklin Templeton
Andrew Ness
Portfolio Manager
Templeton Global Emerging Markets
Timothy Quagliarello
Head of US Institutional Sales
Franklin Templeton