Emerging markets step out of Wall Street’s shadow

For the first time in a decade, emerging market (EM) equity indices have outperformed developed market (DM) indices. By the end of November this year, the index was up by nearly 30%, compared with the MSCI World’s 18% rally.

In 2025, the key benchmark, the MSCI Emerging Markets Index, has rallied every month from January to October – a feat apparently last achieved more than two decades ago.

Emerging market equities have stepped out of Wall Street’s shadow as institutional investors seek greater diversification. Some now view select EM markets as potential defensive plays in an increasingly uncertain global equity environment.

There is growing market consensus that the recovery is not a flash in the pan. It is driven by stronger fundamentals, making it more sustainable than previous rallies.

“It could be that we’ve entered the decade of emerging markets,” says Wim-Hein Pals, head of the emerging markets equity team at Robeco. The Dutch manager has $40bn (€34bn) invested in EM across its various funds, with exposure to around 80 EM companies, depending on the fund.

The MSCI Emerging Markets Index includes 1,189 large- and mid-cap stocks from 24 EM countries. The index is designed to capture about 85% of the free-float-adjusted market capitalisation of each country.

The breadth of companies and economies covered gives investors diversification across sectors — from AI-related technology to commodities, precious metals and consumption-linked stocks.

Asian tigers comeback

Multiple catalysts are at work. Strong gains in many AI-focused tech stocks in South Korea and Taiwan, combined with a weaker US dollar and lower US interest rates, have supported economies as diverse as Brazil and Mexico, as well as Asian economies. Improved earnings outlooks have added further momentum.

South Korean companies like Samsung Electronics and SK Hynix, and Taiwan’s TSMC, all producers of high-performance memory chips, have seen their share prices skyrocket in the wake of the US AI boom.

Mubashira Bukhari Khwaja, an investment director in the global emerging markets equity team at Aberdeen Investments, says East Asian tech companies have become part of the US tech capex supply chain. “Companies like Hyundai Electric, which makes transformers and sells them to the US, for instance, and others like SK Hynix and Samsung Electronics, which produce high-performance memory chips, have done extremely well. The share price of SK Hynix, for example, is up 230% year-to-date,” she says.

Leading EM managers – Franklin Templeton, Robeco, Aberdeen and BlackRock – have started to see increased inflows into their funds, and they expect the trend to continue. They say some institutional investors are taking profits from US equities and channelling the money into emerging markets, another trend that they think will last.

Khwaja tells IPE: “We have certainly seen an uptick in sentiment on emerging markets. But it takes time for sentiment to translate into actual flows. We are seeing overweight recommendations for EMs because it’s a hedge against US dollar weakness. So, we might see more flows next year.”

Asian equities make up 80% of the MSCI EM Index – 73% if China is excluded – with the balance coming from Latin America, the Middle East, Africa (mainly South Africa) and a handful of smaller European markets like Greece and Poland.

Asia has a deep pool of investable companies and stronger long-term growth prospects than Latin America, Africa or the Middle East.

India alone has around 5,500 listed companies. In the first nine months of this year, Indian stock exchanges added 80 new companies, which collectively raised more than $11bn. Indian analysts expect total issuance could reach $20bn by year-end, setting a pattern for coming years.

Valuation and reforms

Robeco’s Pals says several factors are at play, with valuation a key consideration. “Most emerging markets are trading at a 30% discount to developed markets. EM equities are trading at roughly 12 times earnings, compared with 16-plus times earnings in developed markets. In 2024, earnings growth in emerging markets was 21%, versus 9% for developed markets,” he says.

He expects the earnings gap between EMs and DMs to narrow from next year. EM earnings are forecast at around 10% next year and 14% in 2026.

“So when you get low valuation and stronger earnings growth than in developed markets, that makes it a powerful combination,” adds Pals, who oversees Robeco’s fundamental EM investments, totalling around $15bn out of a broader $40bn across EM strategies.

Claus Born, senior vice president and institutional portfolio manager at Franklin Templeton, says: “If you look over the more than 35 years of EM equity history, emerging markets outperform when the US dollar is weak.”

“The markets have underestimated the potential of emerging markets for a long time”, adds Born.

EMs offer a variety of themes, from commodities and precious metals such as gold, to high tech, as well as the ‘evergreen story’ of consumption growth driven by rising living standards.

Apart from global trends, several EMs are undergoing reforms to bring them closer to developed-market norms.

Egon Vavrek, head of emerging markets and of the Asia core team at BlackRock, says South Korean stocks have benefited from government-mandated corporate restructuring aimed at improving transparency and governance. Korean ‘chaebols’ like Samsung and Hyundai have long been controlled by founding families, but “the families are starting to honour minority interests and distribute dividends”, says Vavrek, although the trend is just beginning.

Reflecting their growing contribution, Korean stocks’ weighting in the MSCI EM Index has risen from 9.23% at the trough in March this year to 12% today.

Pals believes that within emerging markets, focus is increasingly shifting from the traditional Asian powerhouses to Latin America and EMEA, which are benefiting from higher commodity prices and currency movements. Brazil, Peru, Chile and South Africa also export base and precious metals, including gold, platinum, palladium and rhodium.

Historically, emerging markets relied on a weaker dollar because they needed dollar funding. But over the years, EMs have reduced their dependence on short-term funding and foreign exchange requirements. This development, says Vavrek, “provides a really nice, credible story of how emerging markets have matured over time”.

India’s ‘very special’ case

In the age of AI hype, India is potentially “an AI hedge” because Indian companies are not involved in the US tech capex boom, says Khwaja at Aberdeen Investments. “If you want to take profits from AI, where do you invest? You invest in countries that are not benefiting from AI, like India and Southeast Asia,” she says.

Khwaja expects that with recent goods and services tax and interest rate cuts, Indian consumers will have greater purchasing power. This may support consumption growth and encourage private capex, which should translate into higher earnings growth expectations.

Born says Indian consumers are shifting from basic consumption to discretionary spending. He notes: “There are many Indian companies that are leveraged to this shift. This is obviously a multi-year, multi-decade theme.”

Unlike Taiwan or South Korea, which rely heavily on tech, India runs its own race, built on rising domestic consumption and steady economic growth. The country is gaining index weight and now accounts for 15.2% of the MSCI EM Index. It has enjoyed annual GDP growth of around 7.8% over the past decade, and its economy is expected to reach at least US$4trn this year.

Born describes India as “very special”. He says: “If you look back over the last 25 years, it has always traded at a premium to other emerging markets because the depth and size of the market give you choice. The performance of the Indian stock market over longer periods has been strong, both in local currency and in US-dollar terms. Its long-term performance is comparable to the S&P 500.”

Foreign money, however, has recently been leaving India for Taiwan and South Korea because Indian stocks are overvalued relative to other EMs.

Pals notes that Indian stocks were trading at 25 times earnings; although they have come back 5% this year, they remain expensive.

But Vavrek points out that domestic inflows have more than offset outflows of foreign money. He says that in the year to October, domestic institutions have likely contributed inflows three times larger.

Khwaja also notes that the Indian market is well supported by domestic investors. India’s mutual fund industry receives $3.5bn in new inflows each month, most of which goes into equities. India also has a deep pool of retail investors.