As a guide to asset allocators, the term "emerging markets" is catchy but flawed. Coined by the International Finance Corporation in 1981 as a replacement for the loaded term "Third World”, it has done its marketing job well for 45 years. But it leaves the questions that matter unanswered. Does it refer to emerging markets or to emerging countries? Must a country have positive momentum to qualify, as "emerging" implies? Does a country reach a stable equilibrium once it has emerged? If not, what happens to the ones that slip back? Most importantly, the label carries a hidden assumption. If some countries are emerging, the others have arrived; the developed markets, by implication, are safe.
Assets With an Asterisk
We prefer a different definition. Emerging markets are assets tied to the economies of risky countries. They are assets with an asterisk next to them, a reminder that country risk is present. The definition captures a duality that the label obscures. When we invest in emerging markets debt (EMD), we invest in fixed income and the broad risk factors of fixed income—global interest rates, credit spreads, and the US dollar—that explain a large share of the asset class' returns in aggregate.
But EMD is also tied to risky countries, and that is its differentiating characteristic. Country risk permeates every constituent, adding volatility and, for investors able to analyze it, offering compensation for bearing it. The same duality holds in equities. For example, a large Latin American e-commerce company operates much like any other online marketplace. But we call it an emerging markets stock because it operates in Brazil, Mexico, and Argentina.
Country risk is not singular. It has several facets: sovereign credit, politics, geopolitics, and structural economic fragility. As a result, emerging markets form a heterogeneous universe spanning almost the entire credit spectrum, many geographies, very different economic structures, and markets ranging from deep and liquid to barely tradable. The label flattens all of this. The asterisk preserves it.
The biggest advantage of replacing "emerging markets" with country risk, however, is what it does to "developed markets”. The emerging-developed dichotomy lulls investors into believing that developed countries have reached a stable plateau from which they cannot fall. If we think instead of a continuum of country risk, we acknowledge that any country can become more or less risky over time.
Country Risk: We Know It When We See It
Defining country risk outright can prove difficult, as it can arise from several different sources with varying correlations. And yet we clearly see it when it is present because it affects every asset class in the country at once. The signature of country risk is the simultaneous decline of a country's major asset classes. When confidence in a crisis-prone country falls, its bonds, equities, and currency fall together. Anyone who has spent a long career in EMD has watched this pattern unfold many times, from Argentina to Türkiye.
How to Count Country Risk
Country risk can be counted. A triple-down day is a trading day on which a country's main equity index falls, its 10-year government bond yield rises, and its currency weakens against the US dollar.1
The more triple-down days a country records, the more its markets are being driven by a common national factor, rather than by the separate forces that normally move stocks, bonds, and currencies.
Counting triple-down days across OECD countries over the 20 years to 2025 produces a ranking that is very telling. The US, Japan, the UK, and Germany recorded the fewest; Türkiye, Mexico, Colombia, and Poland recorded the most. Italy ranks fifth, and Greece, Portugal, and Spain, historically among the more vulnerable sovereigns of the euro-area periphery and once collectively referred to by the pejorative acronym “PIGS”, all recorded more triple-down days than Chile or the Czech Republic. Outside the OECD, Brazil and Indonesia sit at the top of the OECD range. Two caveats apply, however. China has seen relatively few triple-down days, but it maintains capital controls, which suppress the currency leg of the signal. And for members of the eurozone, the currency leg is shared, so the measure understates country-specific stress in, say, France relative to Germany.
The ranking is a snapshot but the more interesting view is longitudinal. Take the UK. The UK's five highest counts of triple-down days in two decades are 2021 through 2025, peaking in 2022, when fiscal credibility and inflation concerns collided under the short-lived Liz Truss premiership. In 2022, 2024, and 2025, the UK recorded more triple-down days than Portugal, Spain, Korea, Hungary, or Greece averaged over the full 20 years. In fairness, these years reflected global shocks as well as domestic ones. But the UK's markets behaved as a single national bet, the type of risk investors assume “developed” rules out.
The Iran War Test
The energy shock that followed the outbreak of the Iran war in March 2026 provides a cleaner test. Normally one would expect more triple-down days in emerging markets than in developed ones. In March 2026, however, Europe's developed markets matched or exceeded them. Germany recorded the most of any country in our sample. The US recorded one of the fewest. The likely explanation is that country risk is multi-faceted, and the facet that mattered in March 2026 was national energy security. Germany, highly vulnerable to external energy shocks, sat at the top of the list. The US, almost self-sufficient in energy, placed near the bottom.
Developed Markets Behaving Like Emerging Markets
A second pattern in the data matters more for the long run. For every developed market in our sample except Italy, Spain, and Portugal, March 2026 looked more extreme relative to its 20-year average than relative to its 10-year average; for those three, and for the emerging markets, it did not. The reason is that triple-down days have risen in developed markets over the past decade while holding steady or falling in emerging ones (Exhibit 1).
EXHIBIT 1
Developed Markets Are Converging on Emerging-Market Behavior
Source: Bloomberg, Lazard. Data as of 16 October 2026.
To understand why country risk in developed markets is rising, we need to look closer at its main drivers:
- Sovereign credit risk—the capacity and willingness to pay
- Political risk—the stability and quality of domestic institutions
- Geopolitical risk—exposure to conflict and shifting alliances
- Structural economic vulnerability—energy dependence, supply-chain exposure
There are reasons to worry about all four, and in each case the deterioration cuts across the line between emerging and developed markets.
Starting with sovereign credit risk, government borrowing in developed countries jumped during COVID-19. This upward trajectory has not reversed. Over the past year, the US and the euro area, together with China, accounted for roughly three-quarters of the increase in global debt. With higher interest rates, the cost of servicing that debt has risen faster than the debt itself.
Turning to political risk, while income inequality between countries has fallen, inequality within countries is high and, in several large economies including the US, has risen over recent decades. At the same time, the main independent monitors of democratic quality—Freedom House, the V-Dem Institute, and the Economist Intelligence Unit—have documented a sustained global decline: weakening institutions, electoral degradation, and constraints on media and political opposition. This democratic backsliding has affected emerging and developed countries alike.
Apropos of geopolitical risk, the transition from the liberal unipolarity of the post-Cold War decades to a more multipolar order has already been accompanied by a rise in military conflict. One compelling theory, from the realist school of international relations, expects this trend to persist because conflict flourishes in uncertainty. In a fragmented world, power, intentions, and commitments are more easily miscalculated.
Finally, on structural fragility, the 2026 energy shock, like the supply-chain disruptions of 2021 and 2022, revealed supply-side vulnerabilities that had been largely overlooked in developed economies. In other words, supply is less elastic than in the previous era of hyper-globalization.2
Country Risk Counts Even More Than Before
All of this increases the imperative of country diversification in asset allocation, and the importance of country-risk analysis in investment processes. The logic is simple: if we see country risk rising in the countries that have historically exhibited less of it, we believe there is a greater role in a portfolio for assets tied to countries that have historically exhibited more of it. Diversification across countries is the best hedge against a national factor.
For US investors in particular, this cuts against a deeply embedded habit. Most US institutional portfolios exhibit a pronounced home bias. Historically, this has been rewarded. The question is whether the conditions that rewarded it still hold.
One further point concerns EMD specifically. If country diversification is the objective, EMD belongs in a portfolio alongside emerging markets equity. That is because the two strategies are largely exposed to different countries. The main EM equity index is dominated by a handful of North Asian economies: Taiwan, South Korea, and China make up 70% of the MSCI Emerging Markets Index. An investor who holds EM equity index exposure and believes the EM box is ticked has “diversified” in name only. In contrast, the main EM sovereign debt index (J.P. Morgan EMBI Global Diversified) spans roughly 70 countries with capped weights, and the local-currency index (J.P. Morgan GBI-EM Global Diversified) covers around 20, with minimal overlap with the equity heavyweights.
The term "emerging markets" asks investors to sort the world into two boxes. Country risk asks them to measure where each country sits on a continuum and in which direction it is moving. The first approach was adequate when the developed world was more stable than it is today, but the evidence now requires the second.
We build our investment process around country-risk assessment because it is the defining characteristic of our asset class. We believe allocators should build it into theirs because, as we argued in There Is No Clear Core, it is no longer confined to our asset class.
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Important Information
Published on 11 November 2026.
1 For the US itself, the currency leg is measured against a broad basket of other currencies.
2 Peter R. Orszag, Eric Van Nostrand, Noah Barbieri, and Layla McDermott, “The New Supply-Side Era: The O-Ring Meets Geopolitics” (Lazard, September 2026).
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