German corporates and pension funds are increasing allocations to emerging market equities via regionally focused, quantitative strategies and bespoke manager selection, amid geopolitical tensions and shifting US policy.
Mercer has conducted 16 asset and liability management studies so far this year for corporates, pension funds and financial institutions, aimed at aligning strategic asset allocation with a challenging capital market environment.
The consultancy, which has completed seven manager selections and initiated a further four, has observed strong demand for emerging market equities – among the most sought-after asset classes in the first quarter of 2026 – according to Kevin Richter, principal and head of implementation at Mercer, in a LinkedIn post.
Richter told IPE that attractive valuations and growth prospects in emerging market economies, particularly in the technology sector amid the AI boom, alongside targeted or stable fiscal and monetary policies, have supported capital inflows into these markets, at least until this month.
“Smaller and less experienced clients have included this asset class in their strategic asset allocation for the first time, as the long-term capital market assumptions regarding return and risk [of emerging market equities] are attractive, leading to a slight increase in the allocation,” he added.
Mercer incorporates stress scenarios, including regime-switching models, in defining strategic asset allocation.
For larger, more experienced institutional clients, Richter identified three main drivers behind increased allocations. “One reason is that the current manager was no longer a good fit for the overall portfolio due to its style tilt,” he said.
A second factor is rising investment volumes, in some cases exceeding €500m. “In this case, the exposure to emerging markets equity was split across two mandates to diversify with regard to manager and alpha source,” Richter explained.
A third driver is dissatisfaction with the performance delivered by existing managers, he added.
Political uncertainty in the US, movements in the US dollar, and broader geopolitical tensions are key factors shaping risk, cost and opportunity in emerging market equity investing.
“The high US dollar weighting in the MSCI World index favours the inclusion of emerging market equity in the overall portfolio. The anticipated weakening of the US dollar, expected by many market participants, reinforces this effect,” he said.
Mercer expects allocations to emerging market equities to remain in the 5–15% range of portfolio assets going forward.
No structural shift
Christopher Schaumlöffel, senior director of investments and head of Western European portfolio management at WTW, said allocations to emerging market equities are primarily undertaken by Pensionsfonds and large corporate pension funds with higher risk tolerance and a need for broad diversification.
“Implementation typically takes place very broadly through global, actively managed mandates, because of pronounced regional differences, geopolitical influences, and market structural inefficiencies in emerging markets, which necessitate differentiated risk management,” Schaumlöffel said.
WTW is not observing a structural increase in German pension funds’ strategic exposure to emerging market equities.
Instead, the consultancy is seeing interest from individual investors in more differentiated approaches within emerging markets, including regionally focused or quantitative strategies.
“This interest reflects a refinement of existing allocations rather than a fundamental reassessment of the asset class,” Schaumlöffel said.
