For the better part of two decades, emerging market (EM) assets—with their attractive valuations—have been the perennial “this time is different” story. Yet performance has been consistently disappointing. For 15 years, from 2010 to 2025, EM equity performance lagged that of developed markets by roughly 500 basis points per year. Even though many EM economies expanded rapidly during that period, robust economic growth often failed to translate into shareholder returns. Lately, however, signs of a significant shift have begun to emerge. In 2025, EM equities outperformed developed market equities by more than 12 percentage points.1 That gap has only widened further in 2026, as EM equities have risen by 24% versus developed market equities’ 10% through the first half of 2026.1
What we are witnessing, we believe, is not merely a cyclical rebound, but a broader structural shift: A region is now re-rating as powerful forces reshape the global economy. With the rise of artificial intelligence (AI), increasing global fragmentation and elevated geopolitical tensions, emerging markets’ economic relevance and underlying fundamentals are evolving fast. Investing in emerging markets—equity, fixed income and even private assets—now means owning an increasingly large share of what the world needs in the age of AI: advanced manufacturing capabilities, semiconductor chips and essential commodities. Tellingly, as this shift occurs, we are also seeing improvements in EM corporate governance, policy credibility and macroeconomic resilience.
Many investors, however, still view emerging markets through the lens of the past and remain under-allocated to both EM equity and debt. While it’s important to take past performance into account, we think that the forces likely to drive future returns are becoming increasingly difficult to ignore. There is a growing case to consider a strategic allocation to emerging markets, and here we explain why.
Before we can make a plausible argument in favor of core allocations to emerging markets, it’s essential to unpack the reasons for underperformance—and what has changed.
The “old economy” problem
Sectoral composition is one of the culprits for EM equities’ historical underperformance. In developed markets, mega-cap technology companies—which form a large part of the S&P 500—propelled returns as many of them compounded earnings at more than 20% annually from 2011 to 2025 with minimal capital intensity.2 By contrast, EM equity indices started the last decade heavily weighted toward financials, energy and materials, all of which have grown more slowly.
As investors rewarded the performance of software, tech platforms and intellectual property, emerging markets remained concentrated in more capital-intensive sectors. The result was a structural headwind for these markets, just as asset-light technology businesses came to dominate global equity returns. Since 2020, those businesses have grown to account for roughly 35% to 40% of the S&P 500’s total market capitalization.3
Emerging markets have had no comparable cohort of tech juggernauts delivering such levels of earnings growth. Until very recently, many EM economies were largely reliant on exports and commodity-linked activity, which suffered in the aftermath of the global financial crisis as trade growth slowed, commodity prices weakened and earnings growth in many emerging economies lost momentum.
Growth did not reach shareholders
Although many EM economies grew in excess of 5% annually between 2011 and 2025, that growth often failed to translate reliably into shareholder returns. Many EM investors saw only modest—or even negative—earnings growth in U.S. dollar (USD) terms.
Often, the missing link was a lack of capital discipline. In the past, management teams (or government officials) often prioritized market share or national policy objectives, such as total employment, over shareholder returns. At the same time, equity issuance, related-party transactions and low-return investments diluted per-share value creation.
China, for example, exemplified this disconnect. Despite years of high single-digit gross domestic product (GDP) growth, its equity markets—dominated by state-owned enterprises—generated nearly flat earnings growth over the past 15 years, and performance stalled. Given that some EM equity indices gave China a weighting of more than 20% in recent years, its lackluster market performance became a significant drag on overall EM returns.
Macroeconomic vulnerability also impacted investor outcomes. Higher inflation, external deficits and less predictable policymaking made many EM economies dependent on foreign capital, leaving them exposed during periods of tighter global liquidity. Episodes such as the 2013 “taper tantrum,” when markets sold off abruptly as the Federal Reserve (Fed) signaled that it would start tapering its post-crisis bond-buying program, and—a decade later—the Fed’s 2022–2023 tightening cycle reinforced the perception that EM returns were as dependent on global capital flows as on corporate fundamentals.
Currency depreciation often compounded the problem for global investors. Even when local markets performed well, gains often failed to translate into USD returns. Over the past 15 years, for example, the MSCI India Index returned more than 11% annually in local currency, but less than 6% in USD terms. The broader MSCI EM Index delivered approximately 8.4% annualized in local currency, but only approximately 5.7% in USD.
In short, EM investing was not simply a bet on growth; it was a bet that economic growth would translate into shareholder returns, that policymakers would maintain stability and that global capital would remain abundant. Too often, one or more of those conditions failed to hold.
Three factors are driving a favorable structural shift in emerging markets. First, emerging markets are supplying more of the inputs needed for the AI buildout and global fragmentation is boosting demand for energy security and supply-chain diversification. Second, capital discipline and shareholder alignment continue to improve across emerging markets. Third, policymakers have gained greater credibility, tightening inflation controls and strengthening balance-of-payments management.
Here, we focus on key growth areas: Taiwan’s and South Korea’s semiconductors and AI hardware; China’s AI ecosystem development; and Latin America’s commodities exports.
Taiwan’s and South Korea’s semiconductors and AI hardware: Taiwan and South Korea are now indispensable links in the global semiconductor supply chain. While one chip designer in particular has dominated the limelight in recent years, its chips are effectively produced by just one Taiwanese fabricator that makes the vast majority of the world's most advanced logic chips. In South Korea, a separate ecosystem of companies dominates the global production of high-bandwidth memory, a critical component in AI models. Demand has far exceeded supply, creating a bottleneck in AI training and inference infrastructure.
As the largest U.S.-based hyperscalers continue to commit hundreds of billions in AI capital expenditures, new revenues are flowing directly into these Taiwanese and South Korean companies—and their countries’ wider economies. We are particularly focused on South Korean and Taiwanese equities, where we expect to see upside to these markets through the next 12 months. (Read our companion piece here.)
China's AI ecosystem: China's technology sector is being driven by an entirely separate AI ecosystem developing in parallel to that of the West’s. China’s AI models tend to be mostly open source, as opposed to the Western—largely American—approach, which restricts access to frontier models through subscriptions or application programming interfaces. China’s open-source strategy allows its frontier AI models to reach more global developers, expanding its AI industry’s influence and competitiveness.
Increasingly, China is also becoming an important producer and exporter of AI-related tech components (specifically semiconductors), making it integral to the global supply chain. The scale of China's AI buildout—and its sustained push for independence from U.S. supply chains—represents a differentiated growth driver in the AI space. Some more patience is likely required for China’s AI investment thesis to play out, given the country’s relatively weaker macro backdrop and corporate fundamentals.
Latin America is back on the (U.S.) radar amid global fragmentation: Trade policy and supply chain realignment are sharpening the U.S. government’s focus on regional energy security and manufacturing resilience. This resounds with a U.S. trade policy where, in 2025, every country was significantly impacted by higher tariffs while Latin America, and especially Mexico, enjoyed a clear advantageous position. Today, as the conflict in the Middle East continues to simmer, the United States and other governments around the world are recognizing a strategic imperative: the need to improve their energy security and diversify the mix. This energy transition—from fossil fuels to renewable energy sources—requires sourcing commodities such as copper and lithium in historically high volumes. Latin America—a region that holds over 40% of all global copper reserves and approximately 60% of known lithium reserves—is a key exporter.
This renewed focus has not gone unnoticed in China. Over the past decade, China has invested more than $200 billion in Latin American mining, energy and infrastructure assets.4 China has now become the region’s main trading partner, significantly surpassing the United States; the U.S. government is plainly focused on slowing some of that momentum.
Latin America is also benefiting from a second implication of the rise in global fragmentation: the need to diversify supply chains and bring them closer to home. Mexico, for example, has recently overtaken China as the leading exporter of advanced technology products necessary for data center construction.
In 2025, U.S. imports from Mexico reached approximately $140 billion versus $60 billion from China (in 2024, U.S. imports totaled roughly $100 billion for both countries).5 Transshipment—importing from Asia and exporting with only modest value add—might account for some proportion of this shift. However, that is likely to change given tighter national and regional content requirements set forth for manufacturing exports during the ongoing review process for the United States-Mexico-Canada Agreement. (See our thoughts here.) That said, these developments provide a clear example of how efforts to secure supply chains by “nearshoring” manufacturing are giving Latin America’s leading economies a competitive advantage.
Across emerging markets, capital discipline and shareholder alignment show signs of improvement. The transmission mechanism—from economic growth to shareholder returns—is being reinforced by policy initiatives designed to encourage more shareholder-aligned corporate behavior.
The South Korean government, for example, has launched a formal initiative to address the so-called Korea discount: the persistent valuation gap between South Korean and global markets as a result of relatively poor corporate governance. Companies are being encouraged to publish capital allocation plans, increase dividends and buybacks, and reduce cross-shareholdings. This regulatory—and social—pressure is catalyzing measurable changes in payout ratios and governance practices.
Unsurprisingly, it is also leading to better market performance: Since its introduction in late 2024, the Korea Value Up Index, which includes companies that meet a range of governance criteria, has outperformed the broader Korea Composite Stock Price Index (KOSPI) by approximately 60%. This outcome is perhaps to be expected: In Japan, an index of companies focused on corporate governance has outperformed the broader Tokyo Stock Price Index (TOPIX) by nearly 100% since the sub-index’s launch in mid-2020.
In China, broader government policy is shifting from a focus on growth at all costs to quality of growth. China’s “anti-involution” campaign—with “involution” defined as a cycle of excessive competition with diminishing or negative returns—aims to reverse long-standing business trends. The campaign is targeting destructive price wars and margin-eroding competition between companies, and allowing some companies in certain sectors to prioritize profitability over market share.
One Chinese multinational’s pivot from an e-commerce price war with its peers toward AI infrastructure investment is emblematic of this trend. It remains to be seen whether corporate governance and shareholder returns can sustainably improve in China given longer-term issues, such as the corporate sector’s fundamental lack of profitability and share dilution. If this were to change in a sustained manner, China may shift from being a selective, tactical play into a longer-term investment opportunity.
Emerging markets’ macroeconomic foundations have undergone a noticeable change over the past decade, with policymakers driving this shift by actively managing inflation risk and offering support for growth. Many countries have also been experiencing a move—albeit unevenly—toward more centrist and pragmatic leadership after years of populism and macroeconomic volatility. These changes suggest that conditions may be conducive to continued stability, an attractive feature for global investors.
In recent years, emerging markets have offered a surprisingly differentiated inflation environment: Average EM inflation has fallen below 4%. Latin American central banks, in particular, managed post-COVID inflation surges more adeptly than many of their developed-market peers by tightening the money supply—and raising policy rates—earlier and more aggressively.
EM sovereign fundamentals are now materially stronger than in 2022. For the median emerging market, fiscal deficits narrowed (-3.6% versus -4.6%), debt burdens are lower (60% versus 65% of GDP), inflation is down (3.8% versus 4.9%), real policy rates are higher (3.1% versus 1.2%), current accounts have swung into surplus (+1.3% versus -0.6% current account), and reserve cover has doubled (2.2x versus 1.1x).6 Meanwhile, developed market balance sheets look more stretched in 2026, with fiscal deficits of -4.9% and debt at 112% of GDP.7
This increasing credibility has manifested in lower currency volatility, tighter sovereign spreads and the ability for EM central banks to ease monetary policy without triggering capital flight. Real interest rates in almost every EM economy now exceed those in the United States, providing sustainable carry and a buffer against capital outflows. This is a luxury that would have been unthinkable for EM policymakers just a decade ago.
The balance-of-payments picture has also improved. Resource exporters are benefiting from elevated commodity prices (one of the drivers of global inflation), while manufacturing exporters are benefiting from supply chain diversification flows. The current account vulnerabilities that made investing in emerging markets so fragile during prior Fed tightening cycles have diminished.
In the past, investors have spoken about emerging markets as a single asset. In reality, emerging markets are less a homogeneous investment category and more a collection of economies exposed to very different growth drivers. Given this context, implementation decisions matter more than ever in emerging markets, and diversification is paramount. As an example, a number of EM equity ETFs exclude Korea, which has been the best performing country year to date. Increasingly, investing in emerging markets is less about making a single macroeconomic bet and more about identifying which countries and companies are best positioned to benefit from the structural forces reshaping the global economy.
We are positive on Asia within EM equities, which accounts for more than 70% of the total EM equity universe by market cap within MSCI emerging markets. Asian markets are central to several of the structural shifts reshaping the global economy, especially AI infrastructure. The combination of AI-driven earnings growth (MSCI Asia ex-Japan Index earnings are expected to grow 53% in 2026), compressed valuations (12x price-to-earnings (P/E), below long-term averages) and still-light investor positioning creates an attractive set of conditions for potential growth.
Taiwan and South Korea, which occupy critical positions in global semiconductor supply chains, are benefiting directly from the AI infrastructure buildout. As investment in AI continues to accelerate, these markets remain best positioned to capture this global growth theme.
The transformation of emerging markets is more than an equity story: Some of the most significant improvements have taken place in credit, where investor perceptions are still shaped more strongly by past crises than by current fundamentals.
For investors seeking income and diversification, we believe that EM credit represents one of the most attractive opportunities in fixed income today. Overall, the hard-currency EM bond market is now a $4.5 trillion asset class spanning more than 70 countries and 10-plus sectors. Yet despite sovereign yields of approximately 6% and corporate yields of 6%–8%, EM debt is often still viewed by many investors as financially fragile—a view that appears increasingly outdated.
Current EM balance sheets show evidence of corporate discipline (net leverage for investment-grade debt is approximately 1.1x; net leverage for high yield debt is approximately 2.7x) and low defaults (running at just about 1.1% year to date). EM high-yield companies generate earnings before interest, taxes, depreciation and amortization (EBITDA) margins that are roughly double those of their developed-market peers, while many sectors exhibit compelling fundamentals.
Financials, for example, have delivered a return on equity of 15%–20% with less than 3% non-performing loans; energy producers can break even with $50 oil; and technology, media and telecommunications companies have generated consistent free cash flow.
As a result, we see particularly high opportunities in corporate issuers from Brazil, Colombia, India, Israel, Mexico and Turkey, where strong market positions, EBITDA margins of more than 15%, leverage of less than 3x and yields often exceeding 7%8 create an attractive combination of quality and income.
As these structural shifts unfold in emerging markets, investors should also take a wider view, beyond public markets, and consider opportunities in private markets—especially in Asia. From our perspective, a meaningful share of the region’s growth and corporate transformation exists outside of public benchmarks: Roughly 85% of firms in Asia with more than $100 million in revenue are private.9 Across the wider region, Asia-Pacific buyout private equity has outperformed public markets over the past decade, generating a total return of 145% versus 83% for the MSCI APAC Index.10 The market has also grown from about $102 billion across 1,048 deals in 2016 to $198 billion across 1,690 deals in 2025.11
Each EM country in the Asia-Pacific region offers different sources of private market return and diversification. In Korea, for example, opportunities in private markets can be viewed as a second-order outcome of the drive for improved corporate governance and capital discipline, as described earlier. But these opportunities are also being reinforced by Korea’s strategic position in the AI supply chain: As global demand for semiconductors and high-bandwidth memory intensifies, pressure is rising on large conglomerates to prioritize returns and sharpen their strategic focus. This pressure is also accelerating restructuring and carve-outs from the country’s traditional “chaebol” system—Korea’s distinctive model of large, family-controlled conglomerates that operate multiple businesses under a common corporate group—a trend that is fueling a steadier pipeline of transaction-driven opportunities for private investors.
With regard to private market flows in India and China, India stands out for its sustained momentum in both deal formation and exits (including a surge in IPO-driven exits in 2025). This momentum, in turn, supports a more complete “build-to-exit” ecosystem for sponsors. In China—under pressure from global fragmentation, a mixed economic outlook and a higher bar for both capital fundraising and deal exits—the emphasis has shifted toward domestically oriented sectors and cash-generative businesses. This trend also puts more emphasis on local capital and places a greater premium on manager selection and risk management.
Despite the positive structural case for emerging markets, investors still appear somewhat reluctant to allocate substantially to EM equities. Cumulative fund flows have been muted (especially compared to the large inflows into the United States) and positioning remains light.
Persistent EM equity valuation discounts—relative to those in developed markets—also remain, indicating that investors are still somewhat unconvinced that the current high earnings growth rate can be sustained, or that shareholder reforms will deliver results. The sharp run-up in EM markets over the past year may have also created some hesitancy; concerns persist about geopolitical vulnerabilities (particularly to oil) and currency sensitivities. But this hesitancy also creates an attractive entry point for a core allocation.
For years, investors viewed emerging markets as a leveraged play on global growth: These were the markets that benefited most when the world economy expanded, and struggled when it slowed. We believe that framing is increasingly outdated. Emerging markets are no longer simply benefiting from global growth; they are helping to drive it.
In our view, the significant structural changes underway warrant treating emerging markets as a core strategic allocation rather than a tactical trade. Many of the defining investment themes of the coming decade will have an outsized impact on emerging markets: AI infrastructure, for example, depends on semiconductor ecosystems in Taiwan and South Korea. Supply-chain diversification is reshaping manufacturing across Asia and Latin America. Resource security still relies on commodities found largely in the emerging world. Yet investor allocations remain anchored to the disappointments of the past, leaving many portfolios positioned for a world that exists only in memory instead of the one that is now emerging.
Can investors afford to remain underexposed to emerging markets? We don’t think so. The coming decade may reward allocators who are bold enough to own more of what the world needs—advanced manufacturing capabilities, semiconductor chips and essential commodities—as powerful forces realign the global economy.
Investors should carefully read the prospectus or other offering documents which include information on the investment objectives, risks, charges and expenses along with other information about the fund before investing.
Diversification and asset allocation does not ensure a profit or protect against loss.
Investing in emerging markets involves a greater degree of risk and increased volatility compared to developed markets. Changes in currency exchange rates and differences in accounting and taxation policies outside the investor’s jurisdiction can raise or lower returns. Some markets may not be as politically and economically stable, in addition to differences in taxation policies, and legal systems outside the investor’s jurisdiction may create additional risks. Investors should carefully consider these risks and consult with financial and legal advisors before investing in emerging markets.
INDEX DEFINITIONS
MSCI World is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets, consisting of 23 developed market country indexes.
MSCI EM (Emerging Markets) is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries, covering approximately 85% of the free float-adjusted market capitalization in each country.
MSCI China is a free-float weighted equity index developed with a base value of 100 as of December 31, 1992, and priced in HKD (refer to M3CN Index for USD).
EM CPI is a measure of consumer price inflation across emerging market economies, tracking the average year-over-year change in the price of a basket of goods and services purchased by households in those markets.
DM CPI is a measure of consumer price inflation across developed market economies, tracking the average year-over-year change in the price of a basket of goods and services purchased by households in those markets.
MSCI Taiwan is a free-float weighted equity index designed to measure the performance of the large and mid cap segments of the Taiwanese market, covering approximately 85% of the Taiwanese equity universe.
MSCI India is a free-float weighted equity index developed with a base value of 100 as of December 31, 1992.
MSCI Brazil is a free-float weighted equity index designed to measure the performance of the large and mid cap segments of the Brazilian market, covering approximately 85% of the Brazilian equity universe.
MSCI South Korea is designed to measure the performance of the large and mid cap segments of the South Korean market, with 80 constituents covering about 85% of the Korean equity universe.
Korea Value Up Index is an index comprising South Korean companies that meet a range of corporate governance criteria, designed to track firms that demonstrate strong shareholder-focused practices such as capital efficiency, profitability, and shareholder returns, introduced in late 2024 as part of the government's initiative to address the "Korea discount."
MSCI Asia ex-Japan (formally the MSCI AC Asia ex Japan Index) captures large and mid-cap representation across two of three Developed Markets countries (excluding Japan) and eight Emerging Markets countries in Asia, covering approximately 85% of the free float-adjusted market capitalization in each country, with Developed Markets including Hong Kong and Singapore and Emerging Markets including China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand.
MSCI APAC is a free-float weighted equity index designed to measure the performance of the large and mid cap segments across developed and emerging markets in the Asia-Pacific region.
KOSPI (Korea Composite Stock Price Index) is a capitalization-weighted index of all common shares on the KRX main board, developed with a base value of 100 as of January 4, 1980.
TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange.
S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries, developed with a base level of 10 for the 1941–43 base period.
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