The case for emerging markets today

Emerging markets (EMs) have spent much of the past decade lagging developed markets (DMs), particularly the US. But recent performance and shifting macro conditions suggest the backdrop may be changing.

A useful starting point is to recognize that EMs are not a single story. They are a diverse group of economies with different growth drivers and risks. That dispersion has been clear in recent years. Taiwan, for example, has delivered strong returns, while China has weighed on broader index performance due to disappointment over measures to boost consumption.^1,2

A turning point in performance

After a prolonged period of underperformance, EMs began to regain momentum in 2025 (Chart 1).

This recovery was supported by a mix of improving sentiment and more favorable macro conditions, with several factors having contributed:

Performance, however, remains uneven. Recent gains have been driven largely by technology-related markets such as Korea and Taiwan, while Latin America has benefited from commodities and a relatively favorable geopolitical position.

Ongoing risks

The case for EMs is not without challenges. Geopolitical tensions, particularly recent events in the Middle East, remain a source of uncertainty.

The disruption to global energy supply – especially through the Strait of Hormuz – could raise inflation and pressure energy-importing economies in Asia despite what appears to be a resolution.

That said, exposure varies by country. China, for example, may be relatively less vulnerable due to its investment in domestic energy capacity and renewables, which may support both economic resilience and industrial development.

Three drivers shaping the emerging market outlook

Looking beyond near-term volatility, we believe the case for EMs today rests on three structural drivers, or rather, the three C’s: carry, CapEx, and cheap.

Currency dynamics (Carry)

EMs have experienced more than a decade of US dollar strength. A weaker dollar could provide a more supportive environment, given the historical inverse relationship between the dollar and EM performance (Chart 2).

A global (CapEx) cycle

A new phase of global investment is underway, driven by:

We believe these trends (Chart 3) tend to benefit economies with strong manufacturing capacity, natural resources, and industrial ecosystems – all areas where EMs are well represented.

Relative valuations (Cheap)

EMs continue to trade at a meaningful discount to DMs (Chart 4), even after recent gains. This reflects past underperformance but also suggests potential value if earnings growth improves.

Technology

Beyond the headline story

Technology remains central to EMs, however, we believe the opportunity is evolving.

Indices have become more concentrated in a small number of large companies. However, long-term opportunities may extend beyond these names. While outcomes in software and AI applications remain uncertain, the infrastructure layer – semiconductors, memory, and energy – appears more stable. Many of these capabilities are concentrated in EMs, particularly in Asia.

A more selective growth story

In our view, the traditional narrative of a broad middle-class consumption boom is becoming more nuanced. While structural growth remains strong in markets such as India and parts of Southeast Asia, rising inflation and weaker confidence have impacted consumers in other regions. As a result, opportunities in consumer sectors are increasingly differentiated and may require a more selective approach.