Emerging markets: Why perception hasn’t caught up with reality

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 (EMs) 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 – can help explain why EMs remain one of the most under-owned parts of the global equity universe (Chart 1).

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 EMs are inherently riskier than developed markets (DMs).

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

Liquidity

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.

Scale

There is also a broader misconception around scale. EMs 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 DM counterparts.

The evidence gap

What markets now look like

The reality today is more nuanced.

Risk

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.^1,2 Many sovereigns also maintain robust external positions, supported by stronger foreign-exchange reserves and improved net international investment positions.

Composition

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 benchmark.³ These markets increasingly share characteristics associated with developed economies, including deeper capital markets, more stable currencies, and ongoing market reforms.

Liquidity

Liquidity has improved in tandem. Market capitalization has more than doubled since 2017, with domestic investor participation helping to provide a more stable source of funding.^4,5

In China, for example, retail investors account for nearly 30% of activity, reducing reliance on short-term international flows.1 Meanwhile, in India, domestic institutions now own more Indian equity than foreign institutions for the first time in over 20 years.¹

Scale

Finally, scale. EMs account for around 24% of global equity market capitalization 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.⁶

In short, EMs are no longer on the fringes. In our view, the asset class is 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 EM 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. This creates a systematic bias: portfolios built around global benchmarks may under-allocate to EMs by design.

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

At the same time, DMs – 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, EM 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 of April, that had fallen to 23%, with Taiwan now taking the crown of the largest market.¹ This points to a structural tension for capital within EMs 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, regime changes, such as currency cycles or shifts in global investment patterns, can redirect capital towards EMs.

Recent developments have started to play that role. In 2025, EMs outperformed DMs by more than 10 percentage points, as improving fundamentals and supportive policy dynamics began to attract investor attention.⁷

Powerful structural forces are also aligning. A revival in investments in the real economy – driven by decarbonization, supply chain diversification, digitalization, and rising defense spending – is driving a new CapEx cycle. EMs provide much of the industrial capacity, technical expertise, and resource base required to support it.

This has direct implications for earnings. EM 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 EMs have them).