Emerging Markets: Fundamentals Fuel Momentum

Key takeaways

Tech remains a core opportunity in emerging markets (EMs), and EM equities more broadly continue to trade at a ~50% discount to their US counterparts.
Strategic commodities, improving policy credibility, and corporate governance reforms are also driving growth, and the US dollar (USD) cycle could be turning in favor of EMs.
Selectivity in EMs continues to be beneficial, strengthening the case for an active approach.

The run of EM equity that began in 2025 has continued in 2026, with the asset class returning more than 23.4% year to date.¹ By comparison, global markets returned about 13.0% in the same period.²

It’s worth noting that today’s EM cycle is fundamentally different from prior cycles. EMs used to be a play on commodities, low-cost manufacturing, and macroeconomic convergence.

Today, these markets represent a significant share of technology, communication services, and other “new economy” sectors fueling corporate earnings growth. Couple this with a supportive policy and governance backdrop (plus the possibility of a weaker USD), and the outlook for EMs may be optimistic.

In this piece, we share three key reasons why we continue to find the EM investment case compelling and outline the investment implications.

1. Technology remains the engine of EM growth

More and more, artificial intelligence (AI) investment is becoming a global capital expenditure cycle rather than a narrow US technology phenomenon, and EM performance has benefited thus far.

Many EM businesses are critical to the global AI value chain. Companies in South Korea and Taiwan, for example, are major producers of semiconductors, which are essential to global AI infrastructure. Yet, valuations and expectations across many Asian technology companies are considerably less demanding than their US counterparts. So, EMs may represent a lower-cost way to access the AI megatrend. And, given the overall demand for increasingly sophisticated computing, we believe the long-term investment case is sustainable, even if bouts of volatility should arise.

2. Strategic commodities, improving government policy, and corporate governance reforms support EMs…

Real assets and strategic commodities represent another structural theme in the investment case for EMs. The fragmented geopolitical environment inspires continued investment in energy security and supply-chain diversification, and critical resources are becoming more strategically important to economic and national security worldwide.

Latin America, in particular, offers exposure to globally important commodity supply chains across both energy and critical resources. The region also benefits from long-term, policy-supported trends like digitalization, financial inclusion, near-shoring, and a political mandate. And parts of Asia – South Korea and China, for example – have seen encouraging shifts in corporate governance, with greater emphasis on capital discipline. Broadly, EMs are becoming both more relevant globally, innovative, and shareholder focused.

3. …and the possibility of a weaker USD doesn’t hurt

Another catalyst for EM equities could be the outlook for the USD. While the timing and magnitude of potential USD weakening is uncertain, it’s a real possibility, as the US faces persistent fiscal deficits and a rapidly growing debt burden.

This is important for EMs because, historically, periods of USD weakness tend to ease EM financial conditions and reduce the burden of dollar-denominated debt. USD weakness would likely encourage capital flows toward higher-growth EMs (Figure 1).

Figure 1: When USD strength wanes, EM performance tends to benefit

Price performance, indexed to 100

Source: Nomura, FactSet. Data from October 31, 2006, to September 30, 2026.

Our views on key countries and regions

India – a pause in momentum, not the end of the story

India has been a relative underperformer in EM because it is less central to the AI narrative – a dynamic amplified by currency depreciation and concerns around energy prices.
The structural investment case remains – large-scale trends toward digitalization, transitioning savings from physical assets to financial instruments, and greater regulation and labor reform may benefit the financial services and consumer-oriented-business sectors.
Portfolio implications: India’s limited exposure to the global AI hardware cycle could make it a potential diversifier if market leadership broadens, though prudent investors may take a discerning view on the opportunities here.

China – innovation remains stronger than domestic demand

Headwinds weighing on Chinese markets include subdued domestic activity, weak consumer confidence, and a property downturn.
China’s global competitive capabilities in AI, electric vehicles, batteries, renewable energy, industrial technology, and advanced manufacturing are tailwinds supporting the investment case for China.
Portfolio implications: Navigating this contrast calls for selectivity – companies with leading positions in strategically important value chains may be more compelling opportunities than those that might arise on the back of a broad cyclical recovery in domestic consumption.

Latin America – attractive value with political optimism

Latin America benefits from several powerful structural themes: critical commodities, financial inclusion, digitalization, and supply-chain diversification.
Valuations in parts of the region remain attractive. A new political mandate could also be cause for optimism in corporate Brazil, as it could unleash pent-up investment and allow for lower interest rates.
Portfolio implications: Identifying the most compelling, long-term opportunities in EMs requires careful evaluation of fundamentals and potential risks.

The bottom line: EMs are attractive but require risk management

Ultimately, we believe the fundamental backdrop for the asset class is strong. This, paired with earnings growth and relatively attractive valuations – EMs trade at almost a 50% discount to US equities – makes for a compelling investment case (Figure 2).

Figure 2: EMs have a greater valuation buffer than the US, suggesting compelling stock prices

Price Earnings, NTM (x)

Source: FactSet. Data from October 31, 2006, to September 30, 2026. For illustrative purposes only. The chart displays price of the MSCI Emerging Markets Index versus the S&P 500 Index on left axis. The right-hand axis displays the discount of the MSCI Emerging Markets Index earnings compared with the S&P 500 Index.

But it’s important to be mindful of the risks, too. Geopolitical uncertainty, tighter financial conditions, currency volatility, and the possibility of a slowdown in the global technology cycle could negatively impact the outlook for EM equities.

This said, potential volatility isn’t a reason to avoid EMs – it’s a reason to be deliberate. Active management is capable of the selectivity that capitalizing on EM opportunities may require. In our view, tapping into the most durable, compelling opportunities in EMs requires bottom-up analysis, identification of long-term, structural support, and a disciplined approach to valuations that active managers are well suited to provide.

1. MSCI Emerging Markets Index, as of September 30, 2026.

2. MSCI All Country World Index, as of September 30, 2026.

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Emerging Markets: Fundamentals Fuel Momentum

Key takeaways

1. Technology remains the engine of EM growth

2. Strategic commodities, improving government policy, and corporate governance reforms support EMs…

3. …and the possibility of a weaker USD doesn’t hurt

Figure 1: When USD strength wanes, EM performance tends to benefit

Our views on key countries and regions

The bottom line: EMs are attractive but require risk management

Figure 2: EMs have a greater valuation buffer than the US, suggesting compelling stock prices

Disclosures

Policies

1. Technology remains the engine of EM growth

2. Strategic commodities, improving government policy, and corporate governance reforms support EMs…

3. …and the possibility of a weaker USD doesn’t hurt

Our views on key countries and regions

The bottom line: EMs are attractive but require risk management

Figure 2: EMs have a greater valuation buffer than the US, suggesting compelling stock prices

Disclosures

Policies

​

Emerging Markets: Fundamentals Fuel Momentum

Key takeaways

1. Technology remains the engine of EM growth

2. Strategic commodities, improving government policy, and corporate governance reforms support EMs…

3. …and the possibility of a weaker USD doesn’t hurt

​

Figure 1: When USD strength wanes, EM performance tends to benefit

​

Our views on key countries and regions

The bottom line: EMs are attractive but require risk management

​

Figure 2: EMs have a greater valuation buffer than the US, suggesting compelling stock prices

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1. Technology remains the engine of EM growth

2. Strategic commodities, improving government policy, and corporate governance reforms support EMs…

3. …and the possibility of a weaker USD doesn’t hurt

Our views on key countries and regions

The bottom line: EMs are attractive but require risk management

Figure 2: EMs have a greater valuation buffer than the US, suggesting compelling stock prices

Disclosures

Policies