Emerging markets had a strong year in 2025. The MSCI EM index rose 34% in US dollar terms, comfortably outperforming developed markets. Even allowing for a weaker dollar, sterling investors saw returns of around 24% – roughly three times the S&P 500. Does that mean the ship has sailed on this asset class for those who missed out?
Our view is that despite last year’s rally, the fundamental case for emerging markets remains intact. In fact, I’d argue that there are more reasons today than ever for investors who’ve shunned this area of global equity markets to reconsider.
The global backdrop is changing. Long-standing political, economic and trade relationships are being tested, particularly under a more disruptive US policy stance. As the rules of global engagement evolve, capital allocation is likely to become more discriminating. In that environment, emerging markets look increasingly well placed.
Why investors are still under-allocated
Global equity portfolios remain heavily skewed towards the US, largely reflecting a decade of sustained US outperformance. Prior to last year, emerging markets had not beaten US equities for almost 10 years. That experience has left many investors anchored to the idea that EMs are structurally inferior or inherently riskier.
China has been a particular drag on sentiment. Accounting for around 27% of the MSCI EM index, it was until recently widely regarded as uninvestable. While the outlook there has improved meaningfully – with policy support stabilising growth and corporate fundamentals recovering – investor positioning remains cautious.
The result is a sharp valuation disconnect. Many EM stocks, including in China, continue to trade on depressed multiples that reflect past concerns rather than current realities. By contrast, US equities – particularly mega-cap growth stocks – still price in a benign outlook despite elevated valuations, rising fiscal risks and increasing concentration.
Even among active managers, the consensus trade remains dominant. Expensive US equities are still widely viewed as ‘safe’, while EM exposure is often treated as optional or tactical.
A shifting balance
There are early signs of a rotation. Earnings momentum in emerging markets has improved, balance sheets are generally stronger than in developed markets, and a weaker US dollar provides an additional tailwind. These factors are becoming harder to ignore.
More broadly, the global economy is changing rapidly. Call it a ‘New World Order’, if you like. We cannot ignore the Trump effect. The tectonic plates of global trade are shifting towards greater fragmentation and more regionally focused partnerships. In this environment, emerging markets – many of which are less indebted, more domestically driven and structurally under-owned – stand to benefit.
There are also several powerful bottom-up themes at work. It’s clear the world is turning to electrification and away from fossil fuels. It might be happening more slowly than many scientists would like, but it’s happening. And it requires a massive change in energy infrastructure. Commodity-rich EM countries hold many of the raw materials needed.
In countries such as Brazil and South Africa, high real interest rates have helped stabilise currencies and inflation, creating scope for policy easing and domestic recovery. Across much of Asia, rising household wealth is supporting consumption, while infrastructure investment remains a key driver in several regions.
Government debt is a factor here. Debt levels in many EM economies are materially lower than in developed markets, particularly the US, where debt grew by over $71,000 a second in the past year – to over $38trn, and close to 130% of GDP. Typically, according to the IMF, EM and developing economies debt levels are around 75% of GDP. It varies from country to country, but it means many EM governments have headroom for important infrastructure investment and fiscal stimulus.
Living in the past?
Despite last year’s strong returns, EMs still trade at a meaningful discount to developed markets and to their own history. That valuation gap exists alongside improving fundamentals and more supportive macro conditions.
As investors, we believe diversification matters – particularly when equity markets are increasingly concentrated and expectations in the US are high. And particularly when the ‘Old World Order’ is changing so rapidly. For those reassessing whether their portfolios are overly reliant on a narrow set of outcomes, emerging markets offer a compelling alternative source of return.
Cynics might argue that as manager of an EM fund, I would say this. My response is that this puts me in a good position to see the opportunities. And I’d back that statement up with another. In the Artemis SmartGARP Global Equity fund, we currently allocate around 27% to EM and 48% to North America. The MSCI ACWI global index has 67% in North America, 3% in China and nothing identified as in EM beyond this. I’d argue that global indices are backward looking. And that’s not helpful at a time of rapid change.
The key question for investors is whether their own portfolios reflect today’s opportunities – or yesterday’s.
Raheel Altaf is manager of three Artemis SmartGARP funds – global emerging markets, global equity and global smaller companies. The views expressed above should not be taken as investment advice.