Archie Hart

Emerging market equities enter 2026 with a compelling combination of improving fundamentals, greater policy visibility and deep structural growth drivers. Despite geopolitical noise and macro uncertainty in 2025, the asset class delivered robust performance, supported by pragmatic policymaking, resilient domestic demand and valuations that continue to stand in stark contrast to stretched levels in parts of the developed world. With diversification already beginning to broaden global market leadership, emerging markets are increasingly positioned to benefit from shifts in global capital allocation.

The macro backdrop also appears increasingly constructive. The current US-dollar cycle has extended far beyond its historical average and now shows signs of reaching maturity, with rate differentials, capital flows and policy dynamics beginning to look similar to previous turning points. Historically, such conditions have tended to favour non-US assets, particularly emerging markets, where valuation starting points are far more attractive.  This combination of cyclical support and improving structural foundations gives EM a stronger starting point than in previous years.

Strong foundations and clearer policy signals support momentum

Emerging markets demonstrated notable resilience last year, with performance comfortably ahead of developed markets. A series of macro shocks failed to unsettle the asset class, largely because investors were able to look through short-term disruption and focus on stronger underlying fundamentals.

Archie Hart, Co-Portfolio Manager, Emerging Markets Equity: “2025 was a strong year for emerging markets, which outperformed their developed counterparts comfortably,” adding that despite tariff noise and regional tensions, “markets looked through near-term disruptions.”  Policymaking across major emerging economies continues to be anchored by stability, transparency and long-term economic competitiveness. China’s renewed emphasis on the private sector, India’s unprecedented scale of infrastructure investment and the Middle East’s acceleration of economic diversification are reshaping growth dynamics across the developing world.

Structural advantages support long-term performance potential

A combination of higher real rates, conservative policy stances and ongoing reform momentum continues to underpin confidence in the asset class. Regions such as the UAE and broader Middle East stand out as structural winners, supported by economic diversification and growing integration with Asia. In South America, improving policy credibility and falling rates are paving the way for renewed domestic and foreign investment.

Hart said: “Emerging markets are benefiting from a powerful combination of reform momentum, policy clarity and increasingly resilient domestic growth. From infrastructure investment in India and economic diversification in the Middle East to improving governance and capital market reform elsewhere, these structural shifts are broadening the opportunity set and strengthening the foundations for long-term growth.”

Beyond technology, reforms across multiple regions, from fiscal consolidation and financial-system strengthening to targeted industrial strategies and deepening trade links, are laying the groundwork for more durable structural growth. These shifts are expanding the opportunity set by improving macro stability, enhancing competitiveness and supporting greater long-term investment.

AI leadership emerges as a critical engine of growth

A significant driver of optimism for 2026 is the scale and depth of emerging markets’ involvement in the global AI value chain. While the conversation is often dominated by US mega-caps, several Asian and emerging market companies have become indispensable to AI hardware, infrastructure and power-intensive ecosystems.

Juliana Hansveden, Portfolio Manager, EM Leaders: “Select companies in Asia and other emerging markets have quietly become indispensable players in the global AI value chain,” supported by established leadership, strong moats and durable competitive advantages.

The performance of the so-called “Secret Seven” – key technology and semiconductor firms across Taiwan, China and South Korea – reflects this shift, with several matching or surpassing the achievements of their US counterparts over the past year.  These companies sit at the centre of the world’s most advanced technology manufacturing cluster, benefiting from deep engineering expertise, tightly integrated supplier networks and some of the highest R&D investment levels globally. They provide the critical bottleneck components, from leading-edge logic and high-bandwidth memory to advanced packaging, switching and datacentre power systems, that determine the pace at which global AI capacity can scale.

At the same time, the traditional defensibility of software is being eroded as AI lowers barriers to entry, increasing the importance of upstream hardware ecosystems where EM companies hold structural leadership.

Market conditions set the stage for broader global allocation shifts

As global investors navigate stretched valuations in developed markets, particularly in US AI-related equities, emerging markets stand to benefit from even modest reallocation flows. The asset class remains relatively discounted while offering broader economic exposure and a more diversified earnings base.

Varun Laijawalla, Co-Portfolio Manager, Emerging Markets Equity: “It is important to note the parallels with earlier market cycles. AI is going to be incredible for the next 25 years, but that does not necessarily make this a good time to buy developed market AI-related securities that already look overstretched.” Even a small shift in global asset allocation — such as 5% moving out of US equities — could translate into a meaningful inflow for emerging markets.”

There is historical precedent for such a shift: after the peak of the dot-com cycle, emerging markets went on to outperform developed markets materially over the subsequent decade as global leadership broadened and capital rotated toward undervalued regions.  Today’s backdrop of stretched DM valuations, concentrated leadership and a potentially moderating US dollar shares several characteristics with that earlier transition.

Navigating risks while securing long-term advantage

While emerging markets remain attractively valued on a relative basis, risks such as renewed tariff uncertainty or short-term volatility linked to US market corrections could create temporary disruptions. However, the structural economic base, diverse earnings profiles and lower starting valuations give emerging markets greater potential to rebound swiftly relative to more concentrated developed markets.

Hart stated: “US policy in South America has also gained attention following recent actions in Venezuela, but this does not change the generally positive view on the broader emerging market asset class. Arguably, if the US erects a security umbrella over the Western Hemisphere and acts to install or maintain western and market-friendly regimes, this could be positive for South American markets.”  While there has been some speculation that a stronger security focus on South America may lead to a weaker focus on other geographies, the status quo in areas such as the South China Sea or Taiwan is unlikely to change in the medium term, with deterring conflict remaining a US priority.

“Pockets tied too closely to a single narrative could face disappointment if growth assumptions cool,” but the broader asset class retains significant resilience. Emerging markets are positioned for stronger recovery potential because “valuations start from a lower level” and the underlying real economy is “far broader based than in the US,” Laijawalla cautioned.”

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Given the boom in AI, companies must invest in bigger, better, faster data in their IT systems to keep up.

With 2023 falling short of expectations in terms of a recovery for emerging markets, Archie Hart and Varun Laijawalla, Co-Portfolio Managers, Emerging Markets Equities at Ninety One, are optimistic on a 1- or 2-year view, now that the building blocks for a turnaround are beginning to fall in place.

Outwardly emerging markets equity returns appear to have disappointed again in 2023, with the benchmark EM index up only 10% in an otherwise strong year for global equity markets. But a deeper analysis reveals much to be positive about. For example, 19 out of 24 emerging markets registered positive US$ returns in 2023. Of the top 8 markets (88% of the universe), 7 registered positive returns, with 6 of the 7 seeing strongly positive double-digit returns. Eastern European equities were up 47%, Latin American equities by 33% and Asian equities by 8%. So why the seemingly weak headline performance of EM? That is entirely due to a rather large bear in the China shop driving returns in that market for the year down -11%. EM ex-China performed robustly up +20% for the year. If a bull was ever to chase the bear out of the China shop, returns could be very strong for the asset class.

A disparate range of countries, at different points in their economic cycles and with widely differing policy environments, emerging markets are an early-cycle asset class and tend to perform strongly as the world recovers from a recession.  Rates in emerging markets have been higher for longer, meaning there are more levers to pull as and when we find ourselves back in a period of monetary loosening. Furthermore, interest rates have normalised between developed and emerging markets, meaning developed markets have lost their low cost of capital tailwind, with the playing field now looking a lot more even. We are close to peak negativity on China, be it politically, economically or corporately.

Finally, one of the big things that drives our asset class is the US dollar. If rates are close to peaking in the US, that removes a big tailwind to the US dollar. If we think the dollar has peaked, that is a positive environment for emerging markets. This makes for an exciting stock-picking opportunity looking forward in our view. In particular, with economic growth likely to be slow and/or slowing in 2024, we believe markets are likely to reward companies that can “win” in this environment and punish “losers” ferociously.

Therefore, we can see the potential for returns to be driven much more by the companies that have been most resilient or have adapted best to this turbulence.  However, there are also likely to be many companies which have yet to wake up to the changes the volatile macro situation has wrought in their businesses. In other words, we are hopeful this will be a year where the market focuses on winning and losing companies, creating a much friendlier environment for stockpickers.

Opportunities within and outside of China

The great thing about the Chinese market is how deep and diverse it is. There are 4,000 listed companies across a wide range of different industries and those industries have sub-cycles in them. We are excited by the energy transition, where China is a leading player, the shift to consumer premiumisation, and travel, where currently, flights from the US to China are still only at 10% capacity relative to pre-Covid volumes.

Looking elsewhere, and this is true of the asset class more broadly, if one country or industry is troubled, there is normally another country or industry doing very well indeed, and that is the case now. While China is obviously going through a tough patch, but we don’t believe it is structurally challenged.

Outside of China, Latin America has had extremely elevated interest rates for some time, and inflation appears under control, meaning when interest rates come down again, that will be positive for those markets. The Middle East is experiencing a capex boom as countries invest the oil windfall into transitioning their economies into a post-oil environment. Additionally, places like Mexico, Thailand, Malaysia and Indonesia are benefiting from supply chains relocating out of China.

If we look industry-wide, technology has been a tough place to be over the last year because we have been working through an inventory glut post-Covid. Given the boom in AI, companies must invest in bigger, better, faster data in their IT systems to keep up. We think there is a great longer-term resource story.

Therefore, we look at a world that we believe is rich in opportunity for our investment process, where the emerging market opportunity has not been so out of favour for 20+ years. This could be a rich period for both market alpha and beta in the emerging world. It is also worth noting that 2024 will profile one of the great positives in our world today – elections involving 4 billion people globally, many of them in emerging markets. We are convinced that Churchill was right, and that democracy is the worst way to run the world apart from all the other ways….thus elections are both a wonderful thing to behold but also a rich source of risk for an investor. Consequently, careful management of risk will also be essential in 2024; that 2024 may bring surprises should not be surprising given the lessons of this decade so far.

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