Why it’s not too late to invest in emerging markets

Emerging markets had a strong year in 2025. The MSCI EM index rose 34% in US dollar terms, comfortably outperforming the MSCI World index. Even allowing for a weaker dollar, sterling investors saw returns of around 24% – roughly three times that of the S&P 500¹. Does that mean the ship has sailed on this asset class for those who missed out?

Our view is that despite last year’s rally, the fundamental case for emerging markets remains intact. In fact, I’d argue that there are more reasons today than ever for investors who’ve shunned this area of global equity markets to reconsider. 

The global backdrop is changing. Longstanding political, economic and trade relationships are being tested, particularly under a more disruptive US policy stance. As the rules of global engagement evolve, capital allocation is likely to become more discriminating. In that environment, emerging markets look well placed.

Investors are under-allocated to emerging markets

Global equity portfolios remain heavily skewed towards the US, largely reflecting a decade of sustained US outperformance. Prior to last year, emerging markets had not beaten US equities for almost 10 years². That experience has left many investors anchored to the idea that emerging markets are structurally inferior or inherently riskier.

Longstanding political, economic and trade relationships are being tested, particularly under a more disruptive US policy stance

China in particular has dragged on sentiment. Accounting for around 27% of the MSCI EM index³, it was until recently widely regarded as uninvestable. While the outlook there has improved meaningfully – with policy support stabilising economic growth and corporate fundamentals recovering – investor positioning remains cautious.

The result is a sharp valuation disconnect. Many emerging market stocks, including in China, continue to trade on depressed multiples that reflect past concerns rather than current realities. By contrast, US equities – particularly mega-cap growth stocks – still price in a benign outlook despite elevated valuations, rising fiscal risks and increasing concentration.

Even among active managers, the consensus trade remains dominant. Expensive US equities are still widely viewed as ‘safe’, while emerging market exposure is often treated as optional or tactical.

Earnings momentum in emerging markets gathering pace

There are early signs of a rotation. Earnings momentum in emerging markets has improved, balance sheets are generally stronger than in developed markets and a weaker US dollar provides an additional tailwind. These factors are becoming harder to ignore.

Many emerging market stocks, including in China, continue to trade on depressed multiples that reflect past concerns rather than current realities

More broadly, the global economy is changing rapidly. Call it a ‘New World Order’, if you like. We cannot ignore the Trump effect. The tectonic plates of global trade are shifting towards greater fragmentation and more regionally focused partnerships. In this environment, emerging markets – many of which are less indebted, more domestically driven and structurally under-owned – stand to benefit.

There are other, longer-term themes at work. It’s clear the world is turning to electrification and away from fossil fuels. It may be happening more slowly than many scientists would like, but it’s happening. And it requires a massive change in energy infrastructure. Commodity-rich emerging markets hold many of the raw materials needed. 

In countries such as Brazil and South Africa, high real interest rates have helped stabilise currencies and inflation, creating scope for policy easing and domestic recovery. Across much of Asia, rising household wealth is supporting consumption, while infrastructure investment remains a key driver in several regions. 

Government debt is a factor here. Debt levels in many emerging market economies are materially lower than in their developed counterparts, particularly the US, where debt grew by more than $71,000 a second in the past year – to more than $38 trillion, and close to 130% of GDP⁴. 

Typically, according to the IMF, emerging market debt levels are around 75% of GDP⁵. It varies from country to country, but it means many emerging market governments have headroom for important infrastructure investment and fiscal stimulus. 

Emerging markets still trade on a discount  

Despite last year’s strong returns, emerging markets still trade at a meaningful discount to developed ones and their own history. That valuation gap exists alongside improving fundamentals and more supportive macro conditions⁶.

As investors, we believe diversification matters – particularly when equity markets are so concentrated and expectations in the US are high. And particularly when the ‘Old World Order’ is changing so rapidly. For those reassessing whether their portfolios are overly reliant on a narrow set of outcomes, emerging markets offer a compelling alternative source of return.

Cynics may argue that as manager of an emerging markets fund, I would say this. My response is that this puts me in a good position to see the opportunities.