Emerging markets (EM) have captured global attention after a remarkable rebound in 2025. Investors seeking growth and diversification are now evaluating ways to include these opportunities in their portfolios. With EM representing 60% of global population and 40% GDP—driving 70% of real growth—yet only 11% of global equity weight, the case for reallocation is compelling. This article explores the driving forces behind EM equities’ recent performance and outlines practical strategies to harness compelling valuations (forward P/E of 14x) for sustainable wealth creation.
Emerging market equities outperformed developed markets in 2025, with the MSCI EM Index delivering a +30% gain versus +17% for the MSCI USA IMI. This marked the strongest relative year since 2009, driven by accelerated technology adoption, policy easing, and renewed global trade dynamics.
Gains were broad-based across North Asia, Latin America, and Africa. Key sectors like technology, healthcare, and industrials posted significant advances, signaling a broad-based sector momentum across economies rather than a narrow commodity rally.
Long-term reforms and demographic shifts position EM for continued outperformance. Pension reforms in India and China enhance domestic savings channels, while credit rating upgrades in several sovereigns reflect strengthening fiscal frameworks. These changes underscore a secular reforms boosting domestic demand trend that underpins growth beyond cyclical cycles.
Structural evolution has moved EM away from pure commodity dependence toward diversified economies. Over 62% of MSCI EM now comprises technology, finance, and consumer sectors, aligning with developed markets at 54%. The result is a diversified and high-quality trajectory that can weather global volatility more effectively.
Favorable demographic profiles and rising middle-class consumption in countries like India and Indonesia further drive resilient domestic demand. With EM representing 60% of global population but only 11% of MSCI ACWI weight, there remains a significant underrepresented relative to global GDP opportunity for investors seeking balanced exposure.
Credit fundamentals in EM have also strengthened, with eight out of ten largest sovereign issuers now rated investment grade. This translates into more stable financing costs and improved debt sustainability, offering fixed-income investors reliable yield and lower default risk compared to past cycles.
The macro backdrop in 2026 is set to provide cyclical catalysts for EM. Expectations of Fed rate cuts and a weaker US dollar offer relief on dollar-denominated debts and enhance local currency performance. This dynamic creates USD weakness and Fed rate cuts tailwinds that mirror historical patterns of EM outperformance.
Trade tensions and slowing growth in developed markets further shift the spotlight to EM economies, which continue to expand via intra-regional trade and domestic investment. Technical indicators point to the technical backdrop supports inflows, as many global funds remain underweight EM after years of outflows.
Historical data shows that when the US dollar declines by over 5% in a year, EM equities have outperformed by more than 8% on average. This pattern underscores the importance of currency dynamics in portfolio performance and highlights the tactical timing for EM deployment as a complement to strategic allocations.
Emerging markets are at the forefront of several global themes. North Asia leads in AI semiconductor production, while India drives software services and digital payments. These factors cement EM as an EM gateway to AI innovation and technology integration hub.
Beyond technology, EM firms are upgrading manufacturing capabilities to global standards, and healthcare innovation is accelerating access to medical technology. EM currencies remain undervalued on a real effective basis, offering carry potential as EM real rates exceed those in developed economies.
Key thematic areas include semiconductors, renewable energy infrastructure, consumer digital platforms, and advanced healthcare solutions, each supported by robust local demand and global partnerships.
Furthermore, environmental, social, and governance (ESG) criteria are gaining traction across EM boards, leading to improved corporate governance and sustainable practices. Investors can align their portfolios with positive impact goals by selecting companies with strong ESG commitment and track record.
Constructing a long-term EM allocation requires balancing opportunity and risk. Core positions in North Asia and India manufacturing capture technology and consumption trends, while Latin America and Africa offer defensive yields through local bonds and FX. A diversified allocation across regions and sectors reduces idiosyncratic exposure and smooths performance.
Risk management is equally critical. Investors should maintain a 10+ year investment horizon mindset to ride through political cycles and valuation volatility. Hedging strategies, such as currency overlays or selective bond positions in investment-grade sovereigns, can further shield portfolios during downturns.
Regular portfolio rebalancing and thematic reviews are essential to capture evolving trends. By adjusting weightings based on valuation deviations and macroeconomic shifts, investors ensure they remain aligned with the most promising EM segments without overconcentration.
Emerging market equities offer a unique combination of growth and diversification at a time when developed markets face demographic headwinds and stretched valuations. By understanding the interplay of secular reforms, cyclical tailwinds, and thematic catalysts, investors can unlock unprecedented growth potential in EM and position portfolios for long-term success.
Seize this moment to blend impact with capital appreciation—investors who look beyond traditional benchmarks and embrace EM’s evolution will be the first to harness its full potential in the years to come.
By combining rigorous analysis with disciplined execution, investors can transform EM from underweighted afterthoughts into cornerstone components of a resilient and forward-looking portfolio.
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