Emerging market equities rose about 34 per cent in US-dollar terms during 2025, outperforming developed markets. The strong performance of EM in 2025 points to EM market leadership broadening, which is continuing into 2026.

“A key driver of emerging markets outlook is the scale of global investment now underway. We are seeing a record investment cycle in areas such as AI infrastructure, electrification, defence and supply chains,” he said.

“Emerging markets are well positioned to benefit because many of the companies and resources needed to support that investment are located in these economies.”

Williams believes that accommodative monetary policy, rising government spending and the potential for shifts in global capital flows could further support emerging market currencies and asset prices in 2026.

Structural themes shaping long-term returns

Williams said there are three long-term structural drivers shaping emerging market returns: technology as a platform, infrastructure investment and the growth of domestic brands and middle-class consumption.

“Rising incomes, urbanisation and increasing domestic demand are transforming many emerging economies, while infrastructure and industrial investment are creating new earnings opportunities across multiple sectors.”

Williams said technology remains a major structural opportunity in EMs, but investors are increasingly focused on whether large-scale AI investment can be monetised.

“For global technology companies, the next phase will be proving that the enormous capital being invested in data centres and AI infrastructure can generate sustainable returns,” he said.

“That creates both risks and opportunities. Valuations in parts of the US technology sector are stretched, while emerging markets offer exposure to many of the companies enabling the next stage of AI adoption at more reasonable levels.

“We expect the next phase of AI growth to focus more heavily on applications, inference and monetisation such as autonomous systems, robotics and smart devices.”

Emerging market valuations remain compelling and provide a supportive backdrop for long-term investors, according to Williams.

“Emerging markets still trade at a discount to developed markets on many metrics, even as earnings growth prospects remain strong.

“For investors willing to take a long-term view, the combination of structural growth, improving corporate governance and attractive valuations creates a compelling opportunity set,” he said.

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Mr Williams expects the strong growth characteristics of EM dividends to continue in the years ahead. Many EM companies now recognise the importance of dividends in attracting investors. As reported in the Bloomberg March 2025 report, since 2001, the number of dividend-paying companies in EM has grown significantly and is now on par with DM.

“Surprisingly, the proportion of EM companies paying dividends, as reported in the Bloomberg March 2025 report, is now similar to that in developed markets (DM) – around 85 per cent. Perhaps more significantly, Jefferies, 2023 actual, reported nearly 40 per cent of companies in EMs pay a dividend above 3 per cent, with yields of over 6 per cent per annum in the energy sector, and over 4 per cent within real estate. Investors can access attractive income opportunities through EM equities,” said Mr Williams, referring to the chart below from Bloomberg, June 2025.

Source: Bloomberg, June 2025 – Past performance does not predict future results.

Strong corporate fundamentals and good underlying economic growth mean dividends have also grown significantly faster in EMs versus DMs since the early 2000s, according to Mr Williams. The unprecedented pace of this growth is reflected in a compound annual growth rate (CAGR) of around 12 per cent over the last 20 years, as reported in the Bloomberg, March 2025 report. The attractive growth characteristics of EM dividends, stemming from both expanding cash flows and rising payouts, are a trend we expect to continue.

Mr Williams believes “the income component of equity investing is critical, as income represents the lifeblood of total returns over time. It not only comes in the form of dividend distributions, but also through the cash flows that companies generate and reinvest to grow tomorrow’s income.”

“The importance of dividends to long term performance can’t be understated. Jefferies, 2023 actual, reported that since December 2000 dividend returns in EM have been among the highest relative to other regions, with half of investor returns coming directly from the compounding effect of dividend payments. In addition, the price return component, which represents the other half of investor returns, is primarily driven by cash flow growth, which in turn fuels dividend growth.” Mr Williams said.

Looking ahead, he believes EMs are set to benefit from a new global investment cycle, linked to key trends such as digitalisation, decarbonisation and defence.

“Historically, EM performance has been tied to the global investment cycle, and we believe we are embarking on a new one. We expect good growth in several sectors, including technology. Technology hardware companies, such as semiconductor producers, for example, represent the new building blocks of the digital economy and the boom in artificial intelligence (AI).

“We are also witnessing substantial demand for data centres that will power our digital economies. This demand has triggered the need for infrastructure investment in antiquated electricity networks. And elsewhere, the shipping industry is also going through a replacement cycle, based on a need for more eco-friendly technologies and greater defence spending.

Emerging markets are in prime position to benefit from these developments as technology owners and low-cost green metal resource providers.

“We believe EMs are evolving into a compelling destination for income-focused investors, offering a rare combination of sustainable high dividend yields and robust profitable growth potential. By leveraging the high and growing income in EMs, we believe that active investors may access attractive opportunities as part of a diversified portfolio capable of generating strong total returns,” said Mr Williams.

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The abrdn Emerging Markets Equity Fund, previously known as abrdn Sustainable Emerging Opportunities Fund, will be managed by senior investment director, Matt Williams, and supported by the Aberdeen global emerging market equity group. The fund invests in a concentrated portfolio of around 80 to 100 emerging market listed equities. It aims to achieve a return (after fees) exceeding the MSCI Emerging Markets Index (AUD unhedged) over a rolling 5 year period.

The fund has broadened its market exposure, providing investors with income and long-term growth through investment in companies listed in, or significantly exposed to, emerging markets. Its holdings include Taiwan Semiconductor Manufacturing (TPE: 2330), Samsung Electronics (KRX: 005930), and Alibaba Group Holding (BCBA: BABA).

Mr Williams says the fund seeks to invest in the highest conviction and income ideas in the emerging market world.

“Emerging markets (EM) have demonstrated strong performance in 2025, rebounding from previous years of underperformance. Valuations for EMs are still attractive, the US dollar is peaking and CAPEX spending is increasing, which are all positive factors for further outperformance by this asset class.

“The goal of our strategy is to deliver a premium and growing income stream for investors across the investment cycle, while observing Aberdeen’s well regarded ESG principles. In delivering our targeted outcome, we aim to capitalise on two specific inefficiencies in emerging markets, which are the compounding effects of dividends and undervalued company fundamentals.

“We recognise that income plays a crucial role in generating significant portions of shareholder returns, yet remains an underappreciated aspect in emerging markets. EM companies, in many cases, have the distinct ability to grow while paying attractive dividends,” says Mr Williams.

ESG principles and stewardship remain upheld throughout the investment process, with ESG screening still applied to restrict investments in lagging ESG performers and companies that violation the UN Global Compact.

SG Hiscock & Company is the exclusive distributor of the abrdn Emerging Markets Equity Fund in the Australian market.

SG Hiscock’s head of distribution, Anthony Cochran says an income focused fund that invests in the emerging world will appeal to Australian investors looking to diversify their equity allocation.

“Matt and the global emerging markets equity team have a solid track record at delivering great returns to investors.

“We believe this fund will complement many investors’ portfolios as they seek to diversify equity exposure across a range of asset classes.

“The fund’s strategy to invest in income generating equities, will also appeal to those investors seeking a regular income stream from their investments, however without compromising on potential capital growth,” says Mr Cochran.

The minimum initial investment in the fund is $20,000.

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Quan Nguyen

In the past month Zenith has been the first Australian research house to rate three new funds from Airlie Funds Management and Firetrail Investments, and as Zenith’s Head of Equities Quan Nguyen explains, backing selective funds early is all part of a value proposition that can benefit adviser clients and their investors.

That’s because like companies, investment funds often have their own life cycle and the potential for strong performance can change as a fund grows and new investors get on board. In the equities space this is particularly true: as the best opportunities are ultimately finite, and getting into a fund early when trading is most agile, can often mean a big difference in returns for investors. In theory at least, the larger a fund grows, the harder it is to sustain the performance of its early days. Wait several years and you have a real prospect of missing the investment boat.

In February this year, Zenith published a research report that determined the best time to invest in a smaller companies fund is at the beginning of its life. Zenith believes this is due to lower levels of FUM during the early stages of a fund’s life. This allows the fund manager to be more nimble when trading stocks, in addition to having a broader investment opportunity set relative to peers who manage more assets. Zenith found that the average Small Cap fund outperformed its benchmark by approximately 12% in the first 12 months of its life. However, as the funds matured, the average excess return gradually declined to a more subdued, albeit still attractive, 7.9% p.a. by year 10, before gradually converging towards approximately 7% p.a. thereafter. As such, we believe value still remains in investing in funds that are more mature with established track records.

Zenith’s philosophy is to empower its advisers to deliver best of breed financial advice by accessing the world’s best investment opportunities as soon as practicable. That requires having a broad, lateral and empathetic mindset on what advisers and their clients require as investment solutions, often before they may be aware of its availability. It requires flexibility from a research team in what is an extraordinarily busy annual review cycle covering over 780 funds. It also requires a bold commitment to review funds through an established and thorough process – no shortcuts. Even if the opportunity for investors appears very compelling, a research rating requires a deep dive and factual assessment of whether a fund can deliver on its objectives for investors.

Quan said “In rating funds early, we need to balance out the priorities and probabilities of approving investment solutions that will add the most value to our advice clients, while allowing an appropriate track record to develop to ensure all ratings are based on solid fundamental principles and high conviction”.

Mark Burgess, Head of Research Relationships at Magellan said “Zenith has shown a willingness to identify and rate quality strategies early. They were first to rate the Magellan Global Fund in September 2007 and they have backed this up again by being first to rate Airlie in June 2018.”

Airlie Funds Managment rated first by Zenith

On 1 June 2018, Zenith initiated coverage on the Airlie Australian Share Fund with a Recommended rating.

The Fund is managed by Airlie Funds Management (Airlie) and distributed by Magellan Asset Management (Magellan). The Fund provides investors with a fundamentally driven, quality and value styled, Australian equities exposure.

Zenith has known both portfolio managers John Sevior and Matt Williams during their tenures at Perpetual where the strategies they managed generated attractive absolute and excess returns.

Zenith has a high regard for Airlie’s senior investment personnel and believes the investment process employed has the Fund well positioned to achieve its investment objectives.

Firetrail Investments rated first by Zenith

On 8 May 2018, Zenith initiated coverage on the Firetrail Australian High Conviction Fund and the Firetrail Absolute Return Fund. The Firetrail Australian High Conviction Fund has been rated Highly Recommended whilst the Firetrail Absolute Return Fund has been rated Recommended.

Zenith’s conviction in the Firetrail Australian High Conviction Fund is underpinned by the consistent application of the investment process which produced impressive long-term excess returns during the investment team’s tenure at Macquarie Asset Management (MAM). Despite the recent formation of the business, Zenith has a high regard for Firetrail’s investment personnel and capabilities and believes the Fund is well placed to meet its investment objectives.

More funds on the pipeline

Zenith is committed to uncovering new, quality investment strategies and presenting new options to its advice practice clients. With each sector asset class review, consideration is given to new funds that may be included in the ratings universe. In the most recent Australian Fixed Income Sector Review released on 31 May 2018, Zenith introduced five new fixed income strategies to the ratings universe.

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