Navin Hingorani

Emerging markets have performed strongly over the past 12 months but given how heavily the index is weighted toward AI and tech holdings, now is the time for investors to be more selective, according to Navin Hingorani, portfolio manager at Eastspring Investments.

“The artificial intelligence (AI) and technology trade has been a prominent factor in the strong performance and earnings growth of emerging markets (EMs) over the past 12 months and we expect this trend to continue in the second half of the year.

“However with a highly concentrated index in AI and tech, it is time for investors to look beyond this trade for other opportunities in EMs, and there are a lot of other opportunities to capitalise on in emerging markets outside of the AI and tech trade,” said Hingorani.

The MSCI Emerging Markets Index has returned around 26 per cent year-to-date (YTD), outperforming the S&P 500. A large amount of that performance has been driven by technology and AI-exposed mega caps like Taiwan Semiconductor Company (TSMC).

Despite many investors pulling out of consumer stocks and reallocating into AI and tech-related stocks, Hingorani says the opportunity set in the consumer sector is shifting.

“For bottom-up managers like ourselves, valuation has always been a big focus. Historically we haven’t found many opportunities in the consumer space, but we are finding a lot more today. Valuations are attractive across various opportunities in the consumer sector and across EM geographies. Our portfolio currently has an overweight position in the consumer sector.”

Hingorani adds that more opportunities are appearing outside the traditional markets in Asia.

“There are 24 markets within EMs. Most investors would be overweight in the traditional markets in Asia, however we are finding more opportunities in markets such as Latin America (LATAM), emerging Europe, Middle East, and Africa. For example, LATAM is a natural beneficiary of higher oil prices, and also benefits from very high real rates.”

With emerging markets offering more than 3000 liquid stocks across 24 countries, Hingorani says an active management approach works best for investors seeking diversification and exposure to emerging markets.

“An active approach works best at identifying stock opportunities in EMs. Investors should be cautious about investing passively into EMs at the moment, as the concentration that we’ve seen with US tech is now happening in EMs. Tech now makes up around 45 per cent of the MSCI Emerging Markets Index, as of 30 June 2026.

“Essentially, a passive EM strategy is going to give you a lot of the same exposure you’re likely already getting through a US equities strategy, given its high tech concentration.”

“If investors are seeking diversification, moving away from a passive approach to emerging markets and allowing an active manager the opportunity to add alpha may be worth considering,” says Hingorani.

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Navin Hingorani

Emerging markets remain well positioned for continued outperformance in 2026, supported by attractive valuations, a weaker US dollar and easing monetary policy in the region, according to Eastspring Investments’ portfolio manager, Navin Hingorani.

Hingorani says the tailwinds that drove emerging markets (EM) to outperform the S&P 500 by around 16 per cent in 2025, remain intact for this year.

“The US dollar remains weak and dropped to its lowest point in four years at the end of January. This is a positive tailwind for EMs.

“EMs in general have higher real rates compared to developed markets, and they have potential to lower rates. A weaker US dollar encourages EMs to ease monetary policy further. Contained inflation and lower rates provide strong tailwinds for domestic demand in those markets.

He says the valuation gap remains compelling in EMs. “Even after a strong year, emerging markets are still trading at around a 60 per cent discount on a price-to-book basis relative to the US.

“With a universe of more than 3,000 stocks and significantly less analyst coverage than developed markets, this offers investors greater opportunity to take advantage of price inefficiencies,” he says.

Hingorani says a ‘value’ investing approach works well in EMs.

“Investors are able to buy stocks where the price does not reflect future earning potential providing investors with good potential to outperform the index,” says Hingorani.

Korea is an example of how value can be unlocked quickly in previously overlooked markets, says Hingorani.

“Korea was unloved going into last year, but was up 100 per cent at the end of 2025. It was one of the top performing markets and it’s already up considerably this year.

“We think there is still further opportunity for investors in Korea. It is home to a lot of companies producing high bandwidth memory that goes into a lot of the AI infrastructure build-out. There has also been improvement in corporate governance under the government’s Corporate Value-Up Program, which has supported Korea’s re-rating.”

Hingorani says emerging markets now represent one of the most compelling opportunities for relative outperformance in many years.

“There are strong valuations, supportive policy settings and improving fundamentals. All the combined together should signal to investors not to ignore this market,” says Hingorani.

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Steven Gray

Emerging markets represent 84 per cent of the world’s population and make up 60 per cent of global GDP – and it is not a sector that should be ignored by investors, according to Eastspring Investments’ portfolio manager, Steven Gray.

He says after a very long period of emerging market underperformance, there are encouraging indications of a turning point for emerging markets compared to developed markets. And apart from the numerous opportunities that emerging markets provide for investment returns, they also play an important role in portfolio diversification.

He sees three crucial drivers of emerging market investment performance in 2026.

“The first is US dollar weakness. Over the long term there is a strong inverse correlation between the trade-weighted US dollar and the performance of emerging markets relative to developed markets.

“On a trade weighted basis the US dollar has weakened during the year, and it is not showing signs of strengthening any time soon.

“There’s an excellent correlation between emerging market outperformance relative to developed markets and US dollar weakness. Not least because emerging markets have lower US sales revenue exposure (around 13 per cent) compared to Japan and Europe (around 20 per cent), making emerging market earnings less sensitive to a weaker dollar, all else being equal.

“Meanwhile expectations for further US Federal Reserve rate cuts are weighing on the US dollar, and keeping it weak,” he says.

A weaker dollar typically gives central banks in emerging markets room to cut rates, and they are doing so. This is the second driver.

“Emerging markets have considerable scope to cut rates given their well-controlled inflation, historically high market-weighted real interest rates that are around 3 per cent, and their lower debt-to-GDP ratios (compared to developed markets).

“This is important because historically emerging markets have outperformed developed markets during easing cycles – provided global growth is benign, as it is now.”

He says the third important turning point for emerging markets is the performance of China compared to the US, particularly since 2020.

“Whether the very expensive US market can continue to outperform from current levels, despite dollar weakness, is debatable. However, China’s strong performance in 2025 so far bodes well for emerging markets.

“China’s commitment to 5 per cent growth is backed by targeted stimulus –  including expanded fiscal spending, bond issuance, and interest rate cuts, which are aimed at boosting consumption through trade-in programmes, social subsidies, and sector-specific lending.

“In addition, Chinese households are sitting on $US22 trillion in deposits which could be a powerful catalyst for spending and hence growth if confidence returns.

“Also positive is the message from China that the era of heavy-handed intervention into the private sector economy is over.

“When you combine this change in government attitude with developments such as DeepSeek, which has invigorated the technology sector, the diminishing impact of the drag from the property sector, as well as initiatives such as the anti-involution policy,  it may all lead to a better focus on returns.

“There are definite legs to the story that China can remain strong – but perhaps most importantly, China doesn’t need to outperform, it just needs to stop being a drag for emerging markets so that overall emerging markets can have a better chance of outperforming relative to developed markets.”

He says it is clear that emerging markets present one of the most compelling opportunities to outperform developed markets in over 15 years.

And within emerging markets, he adds the case for an emerging market value investment style is even stronger.

“Historically, emerging market value has outperformed the broader emerging market index during periods of emerging market outperformance when compared to developed markets (and vice versa). The only exception being during Covid-19 when emerging market value massively underperformed during the initial shock of lockdowns, but subsequently rebounded off a very low base.

“To a large extent, emerging market value magnifies the issues and opportunities of emerging market investment. When emerging markets are unloved, investors tend to crowd into a few popular sectors with stronger long-term growth and higher quality factors. As a result, the valuation dispersion, measured as the price-to-earnings ratio of the most expensive quartile of stocks over the least expensive quartile, increases.

“But when investor interest returns to emerging markets, valuation gaps typically narrow. So if emerging markets were to start outperforming relative to developed markets, I think the cheaper part of that, which is the emerging market value, could outperform even more,” he says.

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