EM equities tend to benefit from a stable or depreciating US dollar, making current conditions favorable for the asset class. This is a function of lower US-denominated debt servicing costs, commodity exporter tailwinds and increased monetary policy flexibility facilitating falling interest rates and supporting economic growth. Additionally, this environment comes hand-in-hand with improved investor sentiment, fostering a virtuous cycle as increased foreign capital flows into the regions further enhance potential investment performance,” says Andrew Mathewson, Portfolio Manager at ClearBridge Investments.

Investing in emerging markets offers exposure to many countries offering economic growth rates, which have generally been faster than most developed nations. “Additionally, EM provides exposure to three long-term structural trends. The Chinese economy is in the early stages of a policy pivot from a focus on deleveraging toward one that targets growth. This creates company-level investment opportunities and encourages more global investor flows to return to China. The launch of China’s DeepSeek chatbot sent shockwaves around the world, highlighting Chinese advancement and shifting assumptions about the cost and scale needed for cutting-edge AI. In addition to China, several other EM countries are key developers of components critical for AI development, offering significant investment opportunities.

“India could offer great upside potential, in our view, as it remains the fastest-growing major global economy, benefiting from a large and young population. Indian valuations have seen a correction back to long-term levels, reinforcing the importance of active management to gain exposure to company-level opportunities,” notes Mathewson.

More broadly, EM equities provide exposure to companies benefiting from accelerated technological adoption, demographic shifts such as urbanisation and the expansion of the middle class and financial inclusion.

“These businesses have world-class innovation capabilities across an array of sectors, all of which benefit from substantial investment in research and development and intellectual property creation. We believe these fundamental trends establish a robust foundation for ongoing economic development and corporate earnings growth in emerging markets.”

In addition to offering potential return upside, EM allocations offer potential diversification benefits that can reduce overall portfolio risk.
“EM stocks often have different economic cycles and sector exposures compared to developed markets, providing investors the potential for less correlated returns and better risk-adjusted performance. Such diversification can be particularly useful in periods when other asset classes struggle. For example, emerging markets have tended to outperform the US market during periods of low US returns.”

Specifically, in the rolling 10-year periods since 1971 when the S&P 500 Index has returned less than 6% annualized, the MSCI Emerging Markets Index has outperformed US equities every time while delivering an annualized return of 12.1%.

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* Data as of September 30, 2025. Sources: Morningstar, S&P, MSCI.

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