Last year was a big year for emerging markets, with the MSCI Emerging Markets index returning almost 25%, the best return since 2017*. In fact, the past couple of years have been strong for the region as the US dollar weakened, the AI investment boom generated enormous demand for memory, advanced chips and semiconductor equipment, we saw accelerated earnings growth and China stopped being a drag on the index.
But the headline figures only tell part of the story.
Performance across emerging markets (EM) has been highly uneven. Korea and Taiwan, with their significant exposure to semiconductors, have been at the heart of the AI-driven rally. Elsewhere, markets have delivered very different experiences – highlighting just how broad and diverse the emerging-market opportunity set has become.
More recently, the asset class has shown encouraging resilience against a more challenging macroeconomic backdrop. The conflict in the Middle East and resulting spikes in commodity prices have increased uncertainty, while renewed inflationary pressures, a more hawkish monetary policy stance and a stronger US dollar have created further headwinds.
So, after such a strong period of performance, is it too late to invest in emerging markets? Beneath the surface, there are a host of reasons we believe the asset class can continue to flourish from here.
1. Valuations
Despite the strong run in the past two years, emerging markets still remain at significant discounts to their developed market peers – a reflection that investor sentiment has scope to improve. This follows more than a decade of underperformance versus the likes of US equities – meaning capital has steadily flowed out of EM funds.
At the start of 2026, figures show the cyclically adjusted price to earnings (CAPE) ratio of US shares trading at 38x earnings, while emerging markets traded at 16x – well below their long-term average and at a 60% discount to US equities**. CAPE judges whether a stock market is cheap or expensive versus their own history by looking at average inflation-adjusted earnings over the past decade (smoothing out the impact of up and down markets).
Forward P/E’s (which compares a company’s share price with its expected earnings over the next 12 months) sit at about 10.5x for EMs vs. about 19x for developed markets. Roughly speaking, you are getting about half the return and twice the valuation multiples for the developed market versus emerging markets.
But not all markets are cheap. India, for example, continues to operate at a significant premium to its peers (on a forward P/E basis) – meaning active managers have to be very selective.
Schroder Asian Alpha Plus fund manager Abbas Barkhordar looks to exploit stock market inefficiencies, with a macroeconomic overlay, to build a concentrated portfolio of between 50-70 predominantly large-cap companies from the Asian region. The manager believes long-term returns are driven by valuation considerations, but he is willing to exploit other opportunities if the investment case is strong enough. The fund is unconstrained and the manager avoids taking very large positions in more volatile companies. The fund is currently underweight India versus its benchmark (7.7% vs. 12.4% for the MSCI Asia AC)***.
2. Reforms
One of the biggest changes in the past decade has been the strengthening of policy frameworks and improved corporate governance. Regulators are strengthening disclosure requirements, board independence and minority shareholder protections, while initiatives in markets such as Korea and China are increasingly focused on improving capital allocation and shareholder returns.
This has helped bolster the income story in Asia. It is now a decade since the Securities and Exchange Board of India made dividend policies mandatory for the top 500 listed companies.
There are around 10,000 dividend-paying companies in the Asia ex-Japan region. Investors also forget that dividends are the primary source of total returns for investors in Asian equities over the long term, accounting for more than 70% of the MSCI Asia ex Japan index’s total returns over the past 30 years^^.
Jason Pidcock, manager of Jupiter Asian Income, targets large companies with reliable dividends that can deliver both income and growth for investors. The fund’s typically higher developed market holdings, notably in Australia, as well as its income mandate, make it a relatively defensive Asia Pacific option. The final portfolio has 40-50 stocks and currently yields 2.4%^.
3. Tech innovation set to continue
Tech has played an outsized role in Asia’s recent outperformance because the region sits at the heart of the global AI and semiconductor supply chain. Taiwan dominates advanced chip manufacturing, while South Korea is a global leader in memory chips, meaning companies in both markets have benefited directly from surging AI-related demand and higher semiconductor prices.
This has translated into rapidly rising earnings and investment, particularly as hyperscalers continue to spend heavily on AI infrastructure. Technology now accounts for around a third of the MSCI Emerging Markets index, making the sector a major driver of overall EM returns. Many believe this is set to continue as a prominent theme – names like TSMC, SK Hynix and Samsung are no longer just EM plays, but strong company plays on a global basis – given they are arguably the biggest semiconductor and memory-related names in the market.
Artemis SmartGarp Global Emerging Markets Equity is a diversified portfolio which combines quantitative analysis with human judgement. The fund draws on Artemis’ in-house software tool that screens companies’ finances to find potential opportunities. It invests in 80-110 companies, with a third of the portfolio in technology stocks***.
4. Currencies
This has been a headwind for emerging markets for more than a decade, with a rising US dollar, strong US equity performance and rising rates impacting emerging markets on a negative basis. But this has started to change and EM currencies now sit below their long-term averages. A number of emerging markets offer substantially higher real interest rates than developed markets, providing investors with an attractive carry while they wait for potential currency appreciation. Many of these economies have also improved their monetary frameworks and reduced reliance on foreign currency borrowing.
5. Diversification
The gospel of diversification is simple: vary your exposure and it’s unlikely everything will fail at the same time. Finding assets that are truly uncorrelated is harder in practice than it is in theory. US equities now account for more than two-thirds of global indices, with the 10 largest companies accounting for around a quarter of passive index exposure.
Emerging markets are exposed to different economic cycles, demographic trends and policy dynamics. Figures reflect this – since the inception of the MSCI Emerging Markets index in 1988, emerging market equities have exhibited a correlation of 0.72 with developed market equities, and just 0.66 with US equities — the figures range from -1 (where something moves in the exact opposite way to the index) to +1 (where it moves in lockstep with the index). It may not seem like a big difference but global equities sit at 0.92 and European equities 0.79 with US equities – reflecting that correlation with the largest US companies**. However, correlations can change over time, and have risen more recently as AI-related companies have grown to represent a larger share of Asian and emerging market indices, meaning these historical relationships may not necessarily persist.
Our final fund is M&G Global Emerging Markets, where Michael Bourke has been lead manager since 2018. The fund’s strategy is based on the premise that individual companies, rather than macroeconomic events, will drive markets. Potential stocks are split into four different baskets: struggling businesses undergoing change; companies with high and sustainable returns; firms benefiting from long-term sector themes; and research-driven companies which are outperforming their peers. The fund has delivered strong long-term performance.
