Why are investors warming to emerging markets?

For most of the period since 2011, emerging market (EM) equities have significantly underperformed their developed market (DM) counterparts. However, over the past year that pattern has shifted.

After a prolonged period of strong returns from the high-flying US market, investors are increasingly looking to diversify into other areas, including emerging markets. This rotation reflects a combination of “push factors” (developments that are prompting investors to question the narrative of continued US “exceptionalism”) and “pull factors” (features that make emerging markets attractive in their own right).

In this month’s commentary, we examine some of the drivers behind renewed investor interest in emerging markets and assess whether these trends are likely to persist.

What is an emerging market?

First, it is important to clarify what is meant by an emerging market. There is no standardised definition of an emerging market, but it is generally understood to be a developing country that is moving toward developed-market status, typically marked by improving but still weaker institutions and regulation, and less-mature capital markets.

Emerging markets are typically characterised by faster economic growth - partly because they are expanding from a lower base - but they are also perceived as higher risk. This reflects a range of factors, including weaker legal and investor-protection frameworks, greater political and policy uncertainty, and less liquid equity markets.

When investors talk about an emerging market, they are usually referring to the 24 countries that are included in the MSCI Emerging Market equities index [1]. Although the index is made up of countries across Europe, the Middle East, Africa, Asia and Latin America, it is dominated by Asian countries, with China, Taiwan, South Korea and India making up approximately 76% of the index [2].

Outperformance, at last

Apart from a few brief periods, emerging market equities underperformed their developed market peers for more than a decade prior to 2025. Between the start of 2011 and the end of 2024, emerging market equities rose around 40%, while developed markets gained nearly 230%, driven by an outsized 368% rise in the tech-heavy US market [3].

However, in 2025 the table turned, with emerging markets rising around 28% and developed markets delivering a more muted return of 17%, as enthusiasm for US equities started to cool [4]. At the time of writing, emerging market equities have continued to outperform so far in 2026 [5].

Several factors have been driving this renewed enthusiasm for EM equities.

Weaker US$ and the “sell America” trade

There is little doubt that emerging market equities, like some other non-US markets, have gained from the so-called ‘sell America’ trade - a market narrative that describes investors’ apparent desire to dial back exposure to US assets. Over the past year or so, investors have sought to diversify away from US large-cap equities due to concerns over historically elevated valuations and heavy market concentration in a handful of mega-cap tech stocks.

Moreover, President Donald Trump’s unpredictable tariff policy, criticism of the Federal Reserve, and rising geopolitical frictions - not least over Greenland - together with suspicions that the current administration favours a more competitive currency, have made investors more cautious about exposure to the US dollar. As a result, the US dollar index - a benchmark that measures the value of the US dollar against a "basket" of six major world currencies - fell around 10% in 2025 and is currently trading close to 4-year lows [6].

As many emerging governments and corporations still borrow heavily in US dollars, a weaker US dollar reduces the cost of servicing US dollar-denominated debt. In addition, a weaker greenback tends to boost international trade and support commodity prices (which are usually denominated in US dollars), while also providing emerging market central banks greater scope to reduce interest rates.

For these reasons, there tends to be an inverse relationship between the level of the US dollar and the relative performance of emerging market equities; EM equities tend to outperform when the US dollar weakens [7].

Exposure to AI

A key “pull factor” drawing investors to emerging markets is that they offer exposure to the ongoing boom in Artificial Intelligence (AI), but with less stretched valuations. Although US markets have recently been dogged by investor concerns over whether the vast sums being spent on AI-related infrastructure will be monetised, several companies in Asia (not least Taiwan Semiconductor Manufacturing Company, TSMC, the largest company in the MSCI EM index [8]) have been key beneficiaries of this huge capex boom.

The bulk of AI server production takes place in Asia (the Taiwanese contract manufacturer Foxconn alone has a market share of around 40% [9]), with much of the kit that goes into datacentres sourced within the region. The South Korean firm SK Hynix is the major supplier of high-bandwidth memory (HBM) for Nvidia’s graphics processing units (GPUs, the specialised processors used to train and run AI models); and one of its main competitors, Samsung, is also Korean [10].

Moreover, strong AI-related demand and supply shortages are also resulting in a sharp run-up in the prices of all types of memory chips [11]. In turn, this is prompting analysts to revise up forecasts for future earnings.

Upward revisions to profit expectations mean that valuations for EM tech companies are still relatively low. For example, Samsung and SK Hynix combined make up around half of the MSCI Korea index, which currently has a single-digit valuation, trading on a forward price/earnings (P/E) ratio of nine [12], compared to over 22 for the equivalent US index [13]. More broadly, JP Morgan note that its basket of Asian AI-related stocks remains relatively attractive versus its US counterpart, even after the recent rally.

Attractive valuations

Indeed, for emerging markets as a whole, equity valuations are relatively attractive compared with their developed market peers. Emerging market equities currently trade on a forward P/E ratio of around 14, which is somewhat higher than its long-term average [14]. However, higher valuations are arguably justified by the sector shift that has happened in recent decades, with the composition of the benchmark transitioning from a cyclical, commodity-driven index to a growth-oriented, technology-heavy one.

By way of example, the materials sector (which includes metals and mining companies etc.) accounted for around 14% of the emerging markets index at the end of 2007 [15], but has since halved to 7% now [16]. Conversely, the information technology sector has gone from 13% of the index to 30% over the same period (i.e. only slightly below the 33% weighting in the US index [17]).

Against this backdrop, the relative valuation of emerging market equities versus developed markets is arguably a better comparison, and on this basis they are comparatively cheap. JP Morgan notes that with a forward Price/Earnings ratio of around 14, emerging market equities currently trade at a 32% discount relative to developed market equities, which is much bigger than the typical discount of 27% [18].

Stronger earnings growth

A related factor that is prompting investors to reassess their view on emerging markets is the earnings outlook. Analysts are revising up their profits forecasts for emerging markets faster than they are for developed markets, and absolute growth in EM earnings is expected to beat that in DM this year.

At the end of last year, the consensus was that earnings per share (EPS) for EM would grow around 18% in 2026, but the current forecast has jumped to nearly 28% [19]. This compares to consensus expectations for profits growth of 12% in Europe [20], and 16% in the US [21].

Again, much of the strong profits growth is resulting from markets with high exposure to AI/tech-related demand. By way of example, profits are expected to rise a whopping 98% in Korea [22] this year, and 27% in Taiwan [23].

Easing trade tensions

Another factor that has improved sentiment towards emerging market equities has been an easing of trade tensions. Many of the tariffs President Trump announced on ‘Liberation Day’ in April last year have been dialled back, and several trade deals have been signed.

Tensions between Washington and Beijing have cooled somewhat, with recent reports suggesting that the 1-year US-China trade truce finalised in October of last year could be extended for another year [24]. In recent months, the US has brokered bi-lateral trade agreements with India, Taiwan and South Korea.

These developments have come amid signs of a pick-up in emerging market export orders [25], which should be supportive of the asset class.

A sustainable rally?

The extent to which the recent rally in emerging market equities can be sustained will depend on several factors. History suggests that trends in the US dollar will be a key consideration, and exchange rates are notoriously difficult to predict.

This said, many foreign-exchange analysts, including those at ABN Amro [26], believe the US dollar is still overvalued on a purchasing power parity (PPP) basis and has further to fall in 2026. Further rate cuts from the US Federal Reserve, under President Trump’s nominee Kevin Warsh, could put downward pressure on the US dollar, and be supportive of relative outperformance of EM equities.

Given the relatively high weighting of technology-related stocks within emerging market indices, a sharp reversal in the AI investment cycle would represent a headwind for EM equities. However, at present there is little evidence of a slowdown in AI infrastructure spending, which continues to support Asian companies positioned further downstream in the global supply chain.

Crucially, valuations appear relatively attractive compared to developed markets in general and the US in particular. Furthermore, several positioning metrics suggest that global investors are still underweight emerging markets relative to benchmark allocations [27], implying scope for supportive capital inflows.

In some countries - notably Korea, India and China - corporate governance reforms are also helping to improve the attractiveness of equity markets.

While downside risks remain - notably a resurgence in trade tensions or a renewed upswing in US growth/inflation that undermines expectations for Fed rate cuts - the backdrop appears supportive of further gains in emerging market equities.

20 February 2026

[1] https://www.msci.com/indexes/group/emerging-markets-indexes

[2] https://www.msci.com/documents/10199/255599/msci-emerging-markets-index-gross.pdf

[3] FE Analytics

[4] FE Analytics

[5] FE Analytics

[6] https://uk.finance.yahoo.com/quote/DX-Y.NYB/

[7] JP Morgan Equity Strategy - FX impact on equities – 9^th February 2026

[8] https://www.msci.com/documents/10199/255599/msci-emerging-markets-index-gross.pdf

[9] https://www.crnasia.com/news/2025/components-and-peripherals/foxconn-s-ai-server-business-overtakes-apple-products-for-fi

[10] https://www.trendforce.com/news/2026/02/09/news-samsung-hbm4-reportedly-to-ship-first-after-lunar-new-year-initial-share-projected-at-mid-20/

[11] https://www.bloomberg.com/news/articles/2026-02-15/rampant-ai-demand-for-memory-is-fueling-a-growing-chip-crisis