Talk of ‘solid returns for emerging markets’ is generally met with a raised eyebrow from investment veterans.
Afterall, there are few obvious similarities between the stock markets of China, Brazil and Korea, for example, and a boom in one country can often coincide with a bust in another.
But the MSCI Emerging Markets index – a basket of 1,189 stocks listed in 24 different nations – was up 27.53 per cent for 2025 by the end of September, compared to a 17.83 per cent gain for the MSCI World index of developed market stocks.
It follows local-currency returns of more than 34 per cent in South Korea, 29 per cent in Mexico and 22 per cent in Brazil.
Meanwhile, an artificial intelligence-driven tech sector sugar rush has helped Chinese stocks – by far the largest constituent of the MSCI EM index – jump 14 per cent and Taiwan’s stock market grow 12 per cent.
UK investors will be familiar with many of the biggest tech names driving the rally; Taiwan’s TSMC, China’s Tencent and South Korea’s Samsung are up 35.2, 62.4 and 82.2 per cent respectively since the start of the year.
And emerging markets stocks still look relatively cheap when compared to developed market peers. MSCI Emerging Markets stocks trade at around 16.4-times earnings compared to more than 30-times earnings in the S&P 500.
UK retail investors, however, don’t appear to be taking notice, with Investment Association figures showing more than £1.1billion withdrawn from global emerging markets equity funds since the start of 2025.
And backing the funds may not have proven as lucrative as the index’s performance suggests, with the average IA Global Emerging Markets Equity sector fund delivering a one-year return of 13.1 per cent – trailing the FTSE 100’s 16.4 per cent return over the same period.
This reflects the diversity of emerging markets and different portfolios, with 16 of the sector’s 181 funds delivering returns of more than 20 per cent and seven suffering losses.
Founder of MCP Emerging Markets Carlos Von Hardenberg said: ‘Emerging markets haven’t performed so well, broadly speaking – just as you can’t say that they’ve performed badly over the last 10 years.
‘It’s really China that has dominated, having de-rated dramatically over the course of the last seven to nine years.
‘We have had quite a different positioning over the last five years, and therefore we’ve significantly outperformed the benchmark.
‘This year has been more challenging because we don’t own much Chinese tech or the state-owned enterprise universe, and that’s been really driving performance this year.’
Trump, tariffs and emerging markets
Nevertheless, major asset managers appear to be turning their attention to emerging market equities.
Aberdeen this week upgraded its outlook on Chinese and broader emerging market equities, with chief economist Paul Diggle arguing valuations ‘are still more attractive than those in developed markets, and a weaker dollar should support EM equity earnings’.
Similarly, Pictet Asset Management said emerging markets ‘remain a key overweight, supported by attractive valuations, improving industrial production, and a widening growth gap versus developed economies’.
If you’ve not been watching closely, bumper EM returns may come as a surprise given the billions of dollars of US trade tariffs imposed on major exporters in early 2025.
But while President Donald Trump’s trade tariffs have caused a degree of economic upheaval in some countries and weighed on the share prices of some exporters, the broad impact on equity markets has so far been muted.
Emerging market equity fund manager at Ninety One Archie Hart explains: ‘While trade is important, it is [roughly] 35 per cent of revenues in the emerging market equity asset class, and only 13 per cent of revenues are driven by exports to the US.
‘This, and a deeply discounted valuation, helps to explain why emerging markets have performed so well despite a surfeit of what could be described as bad news in H1.’
And the International Monetary Fund still expects emerging market and developing economies to grow by 4.1 per cent in 2025, compared with 1.4 per cent growth in advanced economies.
Indeed, the biggest impact Trump has had on emerging markets stocks this year has likely been his influence in driving the US dollar around 10 per cent lower in 2025.
A weaker dollar benefits emerging markets stocks by reducing debt servicing costs, boosting flows into non-dollar assets and lifting commodity prices.
And the latest Bank of America survey also suggests fund managers expect further dollar declines.
Andrew Oxlade, investment director at Fidelity International, said: ‘Investor sentiment is clearly pivoting.
‘With US equity valuations high and the dollar weakening, we’re seeing emerging markets come back into focus – particularly for those seeking diversification, income, and long-term growth.
‘Of course, emerging markets have had a mixed record over the past two decades – especially when compared to the US. But the backdrop today feels different.’
This time is different?
An uncomfortable sense of déjà vu would not be unreasonable here.
Many investors have been burnt in the past by the attraction of low valuations and high returns in rapidly growing economies, and major rallies have often been derailed by disruptive policymaking.
Analysis conducted by Omba Advisory & Investments in 20218 shows emerging markets generally face the most severe market drawdowns – or the scale of decline from an investment’s peak value to its subsequent trough, before it recovers.
Believers, however, point to a decade of progress on corporate reform programmes and new economic initiatives across emerging markets that have helped to significantly dampen market volatility since 2020.
Emerging market equity market volatility was 1.5 to 2 times higher than in developed markets 10 years ago, according to Ninety One, but the difference is now almost negligible.
Fund manager at the group Varun Laijawalla said: ‘While policy uncertainty in the US has intensified, within emerging markets, policy clarity and consistency are much greater.
‘China has confirmed the importance of the private sector in its economy, India is pouring more concrete than it ever has, most of the Middle East is focused on economic progress, and Asia retains its strong economic competitiveness, particularly with technology.’
Others are more sceptical, however, with industry giant BlackRock remaining ‘neutral’ on emerging markets despite this year’s rally, citing ‘geopolitical tensions and concerns about global growth [keeping] us sidelined for now’.
MCP Emerging Market’s Von Hardenberg said: ‘Maybe this is the beginning of a broad-based and sustainable recovery in emerging markets.
‘The biggest uncertainty is, number one, geopolitical policymaking going forward – will there be another phase of very aggressive positioning from the US which will cause further uncertainty?
‘Number two, will the Chinese policy maker continue to be rational? I would probably attach a high probability to this, because they are with their back against the wall, and they really want to ensure that China is able to manage the transition to a more consumption-based and more independent economy that’s less dependent on the state and fixed capital investment.’
Joost van Leenders, senior investment strategist at Van Lanschot Kempen, added: ‘We don’t view the rally in emerging market equities as a reason to increase our allocation to this asset class.
‘China is still having to contend with moderate domestic growth. Consumers are taking it easy, and investment is being squeezed.
‘The new government policy aimed at tackling the fierce competition in industry is unlikely to be much help. China’s real estate sector is still in crisis. Earnings are barely growing.
‘Korea is profiting from the presence of Samsung. Yet expected earnings growth has ground to a halt overall in the Korean equity market.
‘In Brazil, expected earnings have fallen by almost 7 per cent since the start of the year; in Mexico they remain unchanged.’
