Latin America Could Be the Next Emerging Market Frontier as Investors Seek Diversification Amidst Geopolitical Uncertainty

Investors have been increasingly directing capital towards emerging markets in recent years, driven by a quest for substantial stock market gains and the imperative of portfolio diversification beyond the heavily concentrated U.S. market, particularly the S&P 500. However, recent geopolitical events, specifically the military conflict between the U.S. and Iran, have brought the inherent risks associated with emerging market investments into sharper focus. The potential for gains to be disproportionately dependent on a select few stocks, many of which are intricately linked to the artificial intelligence (AI) boom, has become a significant concern.

The iShares MSCI Emerging Markets ETF (EEM) has demonstrated robust performance over the past few years, extending into 2026. In 2025, it saw a notable increase of 29%, and it has managed to maintain a modest gain year-to-date. Despite this positive performance, the ETF’s holdings remain heavily skewed towards Asia. China, South Korea, India, and Taiwan collectively constitute over three-quarters of the index’s weight. Furthermore, a significant portion of its top-performing stocks are technology-related, including prominent companies like Taiwan Semiconductor and Samsung.

Malcolm Dorson, senior emerging markets portfolio manager and senior vice president heading the active investment team at ETF company Global X, highlighted this concentration risk in a recent appearance on CNBC’s "ETF Edge." He stated, "If you look at the index within emerging markets, it’s still roughly 80% Asia." This concentration, he explained, translates to a substantial degree of risk for investors. The broader emerging markets index carries a technology sector weighting exceeding 30%.

South Korean stocks have recently experienced pronounced volatility. The market recorded its worst single-day performance on Wednesday, largely attributed to escalating tensions in the Middle East and the ensuing concerns regarding energy supply to Asia. Top companies in the memory chip sector, crucial to the AI boom and reliant on energy-intensive manufacturing processes, are particularly vulnerable to such disruptions. Following its steepest single-day decline, the South Korean index experienced a significant rebound on Thursday, marking its best trading day since 2008. The iShares MSCI South Korea ETF (EWY) has seen a decline of nearly 13% this week.

A portion of the extreme volatility observed in South Korean equities can be linked to their recent strong performance, which has led to substantial gains for many retail investors. For instance, SK Hynix, a key holding in broad emerging market indexes, surged by 274% last year, while Samsung achieved a 125% increase.

The conflict has also triggered a substantial spike in oil prices, impacting global markets. On Friday, Brent crude futures surpassed the $90 per barrel mark, with U.S. West Texas Intermediate crude futures approaching similar levels. This represents an increase of over 30% for WTI and nearly 26% for Brent crude this week alone.

The energy supply crunch affecting Asian nations has been evident in China’s reported decision to instruct domestic oil refining companies to suspend all fuel exports. Energy market experts anticipate that other Asian nations may adopt similar measures to conserve energy reserves.

Despite these challenges, ETF investing strategists maintain that it is not yet time to divest from emerging markets. They point to certain macroeconomic factors that could support sustained outperformance in these markets over the long term. Dorson advocates for a "barbell approach" to investment strategy, suggesting a balanced exposure across different types of emerging markets rather than an overreliance on a single region. This approach, he argues, would lead investors seeking international exposure to consider Latin America as a counterbalance to Asian markets.

"I think you need to have both," Dorson emphasized. He noted that countries such as Argentina, Brazil, and Colombia have strong ties to the energy and commodities markets. Rising oil prices, he explained, can provide an additional tailwind for these economies, with commodity exposure potentially accounting for "25 to 33% of the story." Furthermore, Dorson highlighted ongoing political reform efforts in Latin American nations, which could further bolster their economies. "All eyes are on political change that could drive fiscal reform," he stated, suggesting that such developments could benefit financial services sector stocks across the region.

Equities in several Latin American markets are also trading at significant discounts compared to U.S. stocks. Many price-to-earnings ratios in these regions are approximately half those found in the S&P 500. For illustrative purposes, Vanguard’s S&P 500 ETF (VOO) currently trades at a P/E ratio of 28, while its emerging markets ETF, (VWO), has a P/E ratio of 18.