Figure 1: EM has outperformed DM and the US YTD
A number of macroeconomic, structural, and geopolitical tailwinds have underpinned the outperformance of emerging markets this year.
- EM equities began 2025 at historically low valuations in comparison with developed markets and expectations of double-digit earnings growth this year and next have attracted global capital.
- A weaker US dollar has supported EM currencies and assets and a shift in market sentiment – away from US exceptionalism – has led to a reallocation towards undervalued EM regions.
- Many EM central banks have benefited from greater policy flexibility as inflation around the world moderates. Earlier rate cuts have supported growth and investor sentiment.
- India, Southeast Asia and the Middle East are benefiting from rising domestic consumption, rapid uptake of digitalisation, and investment in infrastructure
- In China, signs of economic stabilisation, fiscal support, and AI-led innovation have improved sentiment. In our opinion, excess savings and low valuations suggest scope for re-rating.
- Taiwan and South Korea remain central to the global artificial intelligence (AI) buildout, supplying semiconductors and infrastructure.
- Emerging markets are evolving into trade hubs, with intra-regional flows and EM-led value chains gaining prominence.
- While the initial impact of US ‘Liberation day’ tariffs was stark, subsequent moderation of policy and the adaptability of many EM countries has minimised the overall impact of the trade barriers, allowing many EM countries to regain momentum.
Style rotation
The backdrop for emerging markets has become increasingly supportive in recent months, with several macro and style-related headwinds now easing.
Earlier in the year, growth-oriented strategies faced headwinds, as investors favoured yield and value amid heightened macro uncertainty. That dynamic has now shifted because growth is no longer expensive and value and yield are no longer cheap.
This change has helped rebalance market leadership, allowing quality and growth-focused portfolios to regain traction.
Figure 2: The market preference for EM growth stocks is returning
Macro tailwinds into 2026
- Inflation is moderating, and central banks – particularly the US Federal Reserve – are expected to cut rates further.
- The US dollar has weakened, removing a key headwind for EM assets.
- Geopolitical tensions have eased, with lower oil prices and fewer active conflicts contributing to calmer global sentiment.
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1 Bloomberg as at 19 September 2025 (US dollar terms).
2 Ibid.
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