Investing at the crossroads of commodities and emerging markets

China alone has been a major contributor to that relationship as the source for more than 50% of global demand for many individual commodities, and other EM countries in Asia and Latin America (LatAm) are becoming central to the shifting dynamics of global trade and supply chains.¹

Commodities – from oil and gold to copper – have dominated this year’s headlines because of volatility and market activity. Still, many portfolios remain underweight in both commodities and EM stocks.

Concurrently, EMs are asserting themselves as pivotal players in the global economy, offering both challenges and opportunities for investors.

We believe the investment case for both commodities and EMs is strong and should not be overlooked by investors.

Is an infrastructure revolution emerging?

In the early 20th century, steel and coal powered industrial growth, first in the US, then overseas. Today, copper, nickel, natural gas, and rare earth minerals are the new building blocks of electrification, renewable energy, and digital infrastructure – and these materials are largely sourced from EMs.

Chile and Peru produce nearly 40% of the world’s copper.² Brazil’s soy and iron ore exports support global food and construction needs. The economies of Colombia and Ecuador remain reliant on oil. At the same time, Indonesia and the Democratic Republic of Congo are key players in nickel and cobalt supply chains, critical for grid-scale power storage.

As aging infrastructure in developed countries is upgraded and new infrastructure is built in both developed and developing countries, we believe commodity-rich EMs are ripe to benefit.

Emerging markets defy expectations

Contrary to consensus forecasts favoring continued US exceptionalism, EM equities have outperformed in 2025. The MSCI EM Index is up 18% year to date, compared to 8% for the S&P 500, a shift believed to be driven by:^3,4,5

Capital expenditure + the emerging market advantage

Global capital expenditure (CapEx) is rising, and we believe EMs stand to benefit disproportionately. Historically, EM economies have outperformed during periods of elevated global CapEx. So far, the latest CapEx surge has yet to translate into EM outperformance, but if history repeats itself, a sharp correction may be just around the corner (Chart 2).

CapEx regional drivers include tech hardware from Northern Asia, copper supply needs from LatAm, and a massive defense spending increase in Europe, which is rising sharply from what were very low levels (Chart 3).

Commodities: Underowned, undervalued

Broad commodities are underrepresented in most portfolios. Futures positioning specifically in energy commodities, like oil and agricultural grains, is near multi-year lows. Historically, such underweight positioning can precede surprise price increases.

Commodities also serve as a hedge against surprise inflation. The inflation-deflation cycle has averaged 18 years since 1870, and we may be entering a new commodity-driven phase. From 1987 to 2008, the Bloomberg Commodity Index rose 231% as EMs industrialized.^9,10 Today, the combination of large global-scale projects in the energy transition, the AI revolution, and the infrastructure boom is creating conditions reminiscent of that period.

Global energy transition + electrification

The shift to cleaner energy and efficient urbanization is underway, and nowhere is it happening faster than in Asia. China’s electric vehicle market is booming, driven by low charging costs and affordable electric vehicles. Data centers, smart grids, and digital infrastructure are increasing the demand for industrial metals and energy.

Silver, with over 10,000 industrial uses, is a key component in this transition. The gold-silver ratio, a measure of economic pessimism, peaked in early 2020 and again in 2023, which suggests we may be past the worst and entering a growth phase.

From semiconductors to electric vehicle batteries, EMs continue to drive innovation. Urbanization is speeding up, with modern cities popping up across Asia, Africa, and LatAm. Digital banking, e-commerce, and mobile tech are changing how people consume and are often years ahead of developed markets (DMs). These trends depend on data, infrastructure, and raw materials – creating a cycle that benefits both EM equities and commodities.

Valuation + portfolio strategy

EM equities trade at a significant discount to DMs. Currently, US equities trade at prices that average 23 times earnings, while EM trades at 13 times earnings.¹² Said another way, it takes 23 years to pay for every $1 of earnings from a US company, but only 13 years in EM.

Historically, this gap was justified by a weaker rule of law and political instability, which made EM potentially more volatile.

Today, those gaps are narrowing. US political polarization and sweeping policy changes every four years are making domestic investment decisions increasingly difficult.

Add in the fact that US and EM returns are often uncorrelated, and there can be positive portfolio effects. Investor Ray Dalio espouses the value of 10 to 15 uncorrelated return streams to create a superior portfolio.¹³

Strategic role in diversified portfolios

Incorporating commodities and EMs into a diversified investment portfolio can offer several strategic benefits:

Potential inflation hedge + risk diversification

Commodities have historically acted as a hedge against inflation, as sudden price increases in commodities are often the cause of inflation. Gold, in particular, can be an essential asset when the global financial system is stressed either by higher-than-normal inflation or by deflation and currency devaluation. This makes them a crucial counterbalance to stocks and bonds, which often move together in volatile economic conditions.

EMs, while more volatile, offer diversification benefits due to their lower correlation with DMs. Their economic cycles, which can also be driven by domestic consumption and commodity exports, often differ from those of the US or Europe.

Growth potential + yield enhancement

EMs offer higher growth potential than mature economies, as their economies often have higher growth rates. As these countries industrialize and urbanize, their demand for commodities rises, creating a feedback loop that benefits both asset classes. Investors can gain exposure through stocks, sovereign bonds, or direct investments in commodity-producing companies.

Many EM assets offer higher yields, which can boost portfolio returns in a low interest rate environment. For example, sovereign bonds from commodity-exporting nations often deliver attractive risk-adjusted returns, primarily when supported by strong fiscal management and foreign reserves.

Endnotes

¹ "China’s Staggering Demand for Commodities." Chart of the Week. Visual Capitalist, March 2018. https://www.visualcapitalist.com/chinas-staggering-demand-commodities/.
² "Chile and Peru’s copper for energy transition." S&P Global, April 2023. https://www.spglobal.com/sustainable1/en/insights/special-editorial/chile-and-peru-s-copper-for-energy-transition.
³ MSCI EM Index, August 2025.
⁴ The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
⁵ S&P 500 Index, August 2025.
⁶ "India to remain fastest growing economy in 2025 & 2026, while global growth to decline: Morgan Stanley." The Economic Times, July 2025. https://economictimes.indiatimes.com/news/economy/indicators/india-to-remain-fastest-growing-economy-in-2025-2026-while-global-growth-to-decline-morgan-stanley/articleshow/122172107.cms.
⁷ "India’s Economic Juggernaut On Way To Becoming The 3rd Largest Economy." Forbes, July 2025. https://www.forbes.com/sites/sarwantsingh/2025/07/14/indias-economic-juggernaut-on-way-to-becoming-the-3rd-largest-economy/.
⁸ "The 500 GW switchover." Down to Earth, February 2025. https://www.downtoearth.org.in/energy/the-500-gw-switch-over.
⁹ The Bloomberg Commodity Index (BCOM) tracks the performance of a diversified group of 24 physical commodities and is calculated on an excess return (ER) basis and reflects commodity price movements.
¹⁰ Aberdeen Investments (2025, August 7). Investing at the Crossroads of Commodities and Emerging Markets [Webcast]. RIA Channel. https://www.riachannel.com/investing-at-the-crossroads-of-commodities-and-emerging-markets-aberdeen-investments-8-7-25/.
¹¹ "China's economy slows as consumers tighten belts, US tariff risks mount." Reuters, July 2025. https://www.reuters.com/world/china/chinas-q2-gdp-grows-52-yy-above-market-forecast-2025-07-15/.
¹² "Forward P/Es." Global Index Briefings-to-MSCI Global Comparisons. Yardeni Research, August 2025. https://yardeni.com/charts/forward-p-es/.
¹³ Dalio, Ray (2017). Principles. Simon & Schuster.

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