Emerging markets’ three Cs: CapEx, carry, and cheap

The MSCI EM Index has surged by 35%, propelled by a confluence of positive factors that suggest the dawn of a major upcycle.^1,2 We believe this rally is not a fleeting phenomenon but rather the beginning of a new chapter for the asset class, marked by structural shifts and evolving global dynamics.

One of the most telling signs of this transformation was the recent dollar weakness during the Liberation Day sell-off. Traditionally, the US dollar has been considered a safe haven for global investors, but the events of this year have challenged that notion. With vast amounts of capital concentrated in the US, investors found themselves needing to hedge their dollar risk, which has increasingly converged with equity market risk. This shift underscores the changing landscape and the growing relevance of EMs in global portfolios.

Riding the wave of structural shifts

At the same time, EMs are benefiting from powerful drivers that are reshaping the investment case. Semiconductor restrictions have failed to stifle artificial intelligence (AI) innovation in China, and the race between China and the US to build the most successful AI ecosystem remains wide open. Tariffs, often viewed as headwinds, have instead fueled a surge in EM industrials, with Taiwan, Korea, and China leading the pack thanks to their strengths in AI, industrials, and re-rating opportunities.

The recent truce in the US-China trade war has brought some volatility to Chinese tech stocks, but this should be seen in the context of mutual need. China requires advanced AI chips to pursue its goal of socialist modernization, while the US depends on Chinese rare earth refining capacity to advance its own reindustrialization efforts.^3,4 Both countries are committed to developing self-sufficiency in critical sectors, ensuring that the competitive dynamic will continue to shape global markets.

Against this backdrop, the case for EMs can be distilled into three powerful drivers – the three Cs: CapEx, carry, and cheap.

CapEx

The engine of transformation

Global capital expenditure (CapEx) is undergoing a once-in-a-generation transformation, driven by the imperatives to decarbonize, digitize, rearm, and reindustrialize. The rise of India and other emerging economies is amplifying these shifts, reshaping infrastructure, supply chains, and industrial capacity worldwide. EMs are at the heart of this change, providing industrial depth, technical expertise, and resource abundance needed to meet soaring demand.

Historically, EMs have benefited from periods of heightened global CapEx (Chart 1).

However, since 2021, this relationship has faltered, largely due to headwinds in China – the largest EM market. Weak consumption, a property crisis, and investor caution weighed on Chinese equities even as global investment surged. Yet, we believe the worst may appear to be over, with Chinese equities rebounding more than 40% this year.⁵

We believe EM economies are uniquely positioned to enable the next wave of global CapEx. EM companies that are critical to AI chip supply chains, while others play pivotal roles in electric vehicle batteries and shipping production. Resource firms supply essential materials, such as copper and uranium, underpinning the drive to industrialize, rearm, digitize, and decarbonize. This industrial renaissance is creating new opportunities for investors seeking exposure to transformative growth.

Carry

Riding the dollar cycle

The performance of EMs is closely tied to the ebb and flow of the dollar. Dollar cycles have historically shaped EM returns, with periods of dollar depreciation often coinciding with EM outperformance (Chart 2) – especially in Asia and Latin America. We believe the current environment, marked by a weakening dollar, could signal the end of a 14-year stretch of EM underperformance.

Source: Aberdeen, CLSA, September 2025.

This shift is driven by both push and pull factors:

Encouragingly, the MSCI EM Index has continued to outperform developed markets (DMs) over the past three months, even in the face of AI exuberance and a temporary bounce in the dollar.^1,6 As the dollar peaks and begins to decline, we believe EMs stand to benefit from improved capital flows and stronger relative performance.

Cheap

Attractive valuations

Despite this year’s impressive run, EMs remain attractively valued compared to DMs. EM equities continue to trade at a significant discount to their long-term average earnings vs. the MSCI World index (Chart 3) – a gap that has widened due to multiple expansion in a narrow band of US stocks.⁶

While US AI names have delivered strong earnings, CapEx is beginning to catch up with revenue as concept runs ahead of proof.

For investors, we believe this valuation gap represents a compelling opportunity. EMs offer exposure to dynamic growth, industrial transformation, and favorable macroeconomic trends, all at a discount to DM peers. As global capital reallocates and the dollar cycle turns, EM equities are poised to deliver both absolute and relative returns.

Endnotes

¹ The MSCI Emerging Markets Index℠ is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
² MSCI Emerging Markets Index, October 2025.
³ "China Unveils Plans to Establish a Fully AI-Powered Economy by 2035." Futurism, August 2025. https://futurism.com/china-ai-powered-economy.
⁴ "Trump’s China deal eases U.S. rare earths plight for now, but dangers linger." The Washington Post, November 2025. https://www.washingtonpost.com/business/2025/11/01/us-china-rare-earths-deal/.
⁵ "Chinese Equities Explode: Unprecedented 40% Surge Reshapes Global Investment Strategies." Yuan Trends, October 2025. https://yuantrends.com/chinese-equities-sudden-surge-over-40-percent/.
⁶ The MSCI World Index℠ is an unmanaged index considered representative of stocks of developed countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

AA-051125-200643-1