Emerging Markets enter ‘new cycle’ after a lost decade as spending boom set to intensify – and it’s not all about AI
Tettey Addy
After more than a decade in which investors focused on a narrow group of Developed Market (DM) technology winners, Aberdeen Investments (“Aberdeen”) believes there are now more compelling opportunities across a growing number of emerging economies.
Emerging Market (“EM”) performance has always tended to move in cycles, and those cycles have often coincided with periods of rising global capital expenditure.
That’s why the current environment is so interesting. The firm anticipates that EMs, including China, need to invest $42 trillion by 2050[1]– just to keep the lights on and the wheels of industry turning, from manufacturing and technology through to domestic consumption.
At the same time, investors are being paid to wait through faster dividend growth in EMs than in DMs. A large universe of under-researched companies also continues to provide fertile ground for active stock pickers.
Resilience despite the risks
Tettey Addy, Emerging Markets Economic Analyst, Aberdeen Investments, said: “EMs have proven remarkably resilient amid a series of global shocks, while their long-term outlook remains favourable. Ageing populations in advanced economies and China contrast with the centre of gravity of the global workforce shifting toward emerging Asia and Africa, which together will account for close to 70% of the world’s workers in 2050[2]
Rising urbanisation, developing technology supply chains, and rising electricity demand – especially in China despite its demographics – are set to drive a new investment cycle. We estimate EMs will require more than $40 trillion in infrastructure spending between 2025 and 2050, creating significant opportunities for growth, productivity and investment.”
The Emerging Markets cycle: from lost decade to potential turning point
During the 2000s, China’s rapid industrialisation helped drive a surge in infrastructure spending, manufacturing investment and commodity demand, creating one of the strongest periods of EM outperformance.
But the decade following the Global Financial Crisis was characterised by weaker capital investment and a growing focus on asset-light business models, buybacks and a narrow group of DM technology winners, contributing to a prolonged period of EM underperformance.
Today, the backdrop is beginning to look different. Investment linked to AI, electrification, energy systems, infrastructure and manufacturing capacity is accelerating
Nick Robinson, Head of Global Emerging Market Equity at Aberdeen Investments, said: “Much of the initial investment in the AI theme flowed into US and DM companies, particularly the largest technology stocks. More recently, however, EM companies have begun to participate more meaningfully.
This is increasingly visible in corporate earnings, with Korean and Taiwanese technology companies continuing to experience strong demand for their products. The opportunity is also broadening beyond the largest semiconductor businesses into infrastructure, commodities and other parts of the supply chain.”
Income is an underappreciated driver of Emerging Market returns
EMs are often associated primarily with faster economic and corporate growth. However, dividends now represented around half of total EM equity returns and EM dividends recorded an annual compound growth rate of 11.8% between 2003 and 2025, compared with 7.4% in DMs[4]. There are now more companies paying dividends in EMs than in DMs.
As EM companies have matured, stronger cash generation and improving corporate governance have encouraged more businesses to return capital to shareholders.
Nick Robinson added: “Dividends are a powerful signal of capital discipline and a company’s willingness to return cash to shareholders. By combining higher-yielding companies with businesses capable of growing their dividends, investors can access both value and growth opportunities while managing some of the factor and country risks associated with EMs.
Income also gives investors something tangible while they wait for the longer-term investment case to develop. In a more uncertain market environment, that combination of cash returns, growth potential and capital discipline can be particularly valuable.”
Smaller companies can broaden diversification
Market concentration has become one of the defining themes of investing. In DMs, the US now accounts for around 70% of the MSCI World Index[4].
In EMs, the concentration can also be pronounced. The 10 largest stocks account for around 37% of the MSCI Emerging Markets Index, while Taiwan represents close to 30% of the benchmark. In Asia, the 10 largest stocks accounting for around 43% of the MSCI AC Asia ex Japan Index.[5]
That’s where smaller companies can come into their own, Aberdeen believes – and allow managers to hunt for returns off the beaten track.
Gabriel Sacks, Lead Manager of Aberdeen Asia Focus Investment Trust and Investment Director of Asian and Emerging Market Equity at Aberdeen Investments, said: “Data centres and robotics are important parts of today’s investment landscape, but we need more than that to keep the world turning. Economies need many other sectors to support activity and long-term growth.
One of the biggest misconceptions is that moving down the market-cap spectrum necessarily means taking more risk. Looking back over almost 30 years of data, investors who blended EM small caps with traditional large-cap exposure would have historically achieved higher returns with lower volatility[7]. That is because smaller companies give investors access to a much broader range of businesses, sectors and economic drivers than those represented in headline indices.”
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