Emerging markets: stay ahead as perceptions shift

It’s a view shaped by past political and economic crises, uneven growth and structural risks that once defined the asset class. But it is increasingly out of step with how emerging markets look today.

Over the past two decades, fundamentals have shifted, institutions have strengthened, balance sheets have improved and markets have matured.  

This mismatch – between what investors believe and what the data shows – helps explain why emerging markets remains one of the most under-owned categories in the global equity universe.

So, what is holding investors back? And why are they beginning to reconsider?

The perception gap: what investors still believe

The most enduring perception is that emerging markets are inherently riskier than developed markets.

That view is not without historical justification. Periods of crisis in emerging markets continue to leave a lasting impression – from the Asian financial crisis to Argentina’s repeated defaults – and continue to reinforce concerns around currency swings, erratic monetary policy and political instability.

Liquidity is another common concern. Many investors still associate emerging markets with shallow trading volumes and dependence on foreign capital, which can amplify market moves in periods of stress.

There is also a broader misconception around scale. Emerging markets are often seen as too small to matter – a peripheral allocation rather than a core part of global portfolios.

Individually, these beliefs are understandable. Taken together, they create a perception of an asset class that is less stable, less liquid and less important than its developed market counterparts.

The evidence gap: what markets now look like

The reality today is more nuanced.

Let’s start with risk. The relative volatility of emerging and developed markets has converged in recent years, reflecting improved macro stability across many economies. Balance sheets have improved, with corporate leverage now significantly lower than in the US [1]. Many sovereigns also maintain robust external positions, supported by stronger foreign-exchange reserves and improved net international investment positions.

The composition of the asset class has also evolved. Today, the majority of emerging market equity exposure is concentrated in large export-driven economies such as China, Korea, Taiwan and India, which together account for around 77% of the MSCI Emerging Market Index [2]. These markets increasingly share characteristics associated with developed economies, including deeper capital markets, more stable currencies and ongoing market reforms.

Liquidity has improved in tandem. Market capitalisation has more than doubled since 2017, with domestic investor participation helping to provide a more stable source of funding.

In China, for example, retail investors account for nearly 30% of activity, reducing reliance on short-term international flows [3]. Meanwhile, for the first time in over 20 years, more Indian equities are owned by domestic investors than foreign institutions [4].

Finally, scale. Emerging markets account for around 24% of global equity market capitalisation and represent more than 61% of global GDP on a purchasing power parity basis. They have also driven roughly 70% of global economic growth in recent years [5].

In short, emerging markets are no longer on the fringes. They are central to global growth, production and capital formation.

The allocation gap: why portfolios were slow to move

If the fundamentals have improved, why until 2025 had emerging market allocations been falling?

Part of the answer lies in structural inertia. Portfolio allocations tend to adjust gradually, particularly when shaped by long-standing assumptions around risk and diversification.

Another factor is benchmark construction. Despite their economic weight, emerging markets remain underrepresented in global equity indices. China alone accounts for around 12% of global free float but only around 3% of the MSCI ACWI Index [6]. This creates a systematic bias: portfolios built around global benchmarks may under-allocate to emerging markets by design.

As we highlighted, behavioural biases – anchored in past experiences – continue to play a role.

At the same time, developed markets – particularly the US – have delivered strong returns, reinforcing existing allocations. But this performance has come with increasing concentration around the US. While equity market concentration is a broad phenomenon, driven in large part by passive ETF flows, emerging market concentration is based around several different regions, with no one market dominating for long.

China peaked in 2020, at that time representing 40% of the index. As of the end April 2026, that had fallen to 23%, with Taiwan now taking the crown as the largest market [7]. This points to a structural tension for capital within emerging markets that isn’t present in global indices.

What might trigger a reassessment?

Historically, shifts in allocation tend to follow changes in market conditions rather than precede them.

Periods of volatility often act as a catalyst, exposing concentration risks and prompting investors to revisit diversification. Similarly, market turning points – such as currency cycles or shifts in global investment patterns – can redirect capital towards emerging markets.

Recent developments have started to play that role. Renewed geopolitical tensions and a resurgence of trade barriers have added to market uncertainty, helping to shift investor focus. In 2025, emerging markets outperformed developed markets by more than 10 percentage points, according to MSCI data, as improving fundamentals and supportive policy dynamics began to attract investor attention.

Powerful structural forces are also aligning. A revival in investments in the real economy – driven by decarbonisation, supply chain diversification, digitalisation, and rising defence spending – is driving a new capex cycle. Emerging markets provide much of the industrial capacity, technical expertise and resource base required to support it.

This has direct implications for earnings. Emerging market growth has historically been closely tied to global investment cycles, and early signs of that relationship reasserting itself are already visible. In a world of rising capex, the makers matter more – and emerging markets have them.

Final thoughts…

A lot can change in 20 years. Once dismissed as too risky, emerging markets have evolved into a richer, more resilient and more structurally important asset class. Yet investor allocations still reflect an earlier era.

Bridging that gap does not require a wholesale shift overnight. But it does require a reassessment of long-held assumptions, particularly as the underlying drivers of global growth continue to shift.

Because in today’s market environment, the bigger risk may not be owning emerging markets – but continuing to underestimate their importance.

[1] [2] [3] [5] [6] [7] Source: Aberdeen, MSCI, December 2025.

[4] Goldman Sachs Investment Research May 2026. 

Investing in emerging markets can involve more risk than more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks.