Emerging Markets 2.0: The Tipping Point is Here
We see strong signals that the “lost decade” in emerging markets is over and we believe it’s time to invest in these rapidly developing regions. The future is already being built in the emerging countries poised for pursuing exceptional growth.
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Key takeaways
- The decade-long relative underperformance of emerging markets is set to reverse as these countries experience extraordinary growth and a technological revolution.
- Emerging regions are significantly under-owned by investors, and the relative discount on these markets is near an all-time high.
- Investing in emerging economies offers diversity, while active, risk-adjusted, selective investment can give protection against heightened volatility.
Executive summary
The end of the emerging markets “lost decade"
Emerging markets (EM) may be entering a major turning point after years of lagging behind U.S. equities. While the past decade was dominated by U.S. technology leadership and strong American equity performance, emerging economies faced headwinds from weak currencies, property downturns, and geopolitical uncertainty. This trend may be beginning to reverse as EM countries experience stronger growth prospects, improving industrial competitiveness, and rapid technological advancement.
We believe that emerging markets are now positioned to potentially outperform developed markets due to structural advantages, including favorable demographics, urbanization, expanding middle classes, and increasing domestic innovation. Investors are also significantly underweight EM assets, which is likely to create opportunities as capital flows shift globally.
China, South Korea, and Brazil could drive the next growth cycle
Three countries stand out as major potential contributors to EM growth: China, South Korea, and Brazil. China continues to expand its influence in artificial intelligence (AI), electric vehicles, renewable energy, robotics, and advanced manufacturing. China’s vertically integrated supply chains and technological scale are key competitive advantages supporting long-term economic growth.
South Korea is positioned as a global leader in semiconductors, batteries, defense, shipbuilding, and industrial exports. Governance reforms, shareholder-friendly policies, and low market valuations are helping strengthen the country’s investment case. Brazil, meanwhile, benefits from abundant natural resources, agricultural exports, oil production potential, and a growing domestic consumer market supported by favorable demographics and improving economic reforms.
Emerging markets are central to the AI revolution
In our view, emerging markets are not just participating in the global AI boom, they are helping build it. Taiwan and South Korea dominate semiconductor manufacturing, while regions such as Latin America and the Middle East will be primary sources for critical data infrastructure, including energy and raw materials needed for AI expansion.
Emerging economies are also rapidly integrating AI into industries such as finance, health care, telecommunications, education, and e-commerce. These regions are becoming innovation hubs in their own right, rather than simply following developed market trends. This growing technological independence could support long-term economic and market growth across EM regions.
Attractive valuations and diversification opportunities
One of the strongest arguments for EM investing is valuation. In our opinion, EM equities are trading at substantially lower valuations than U.S. stocks, with discounts exceeding 40% relative to the U.S. market. At the same time, we believe the narrative of U.S. exceptionalism is weakening amid inflation concerns, policy uncertainty, and slower expected growth.
Emerging markets may provide diversification benefits for investors heavily concentrated in U.S. assets. Many EM economies are driven by domestic growth factors such as rising consumer spending, infrastructure investment, and industrial development, which may be less correlated with U.S. economic cycles.
Active management is critical in emerging markets
Despite the opportunities, EM investing still comes with elevated risks, including political instability, currency volatility, regulatory uncertainty, and sharper reactions to global events. We believe an active, highly selective investment strategy may help manage these risks more effectively than broad passive exposure.
Our approach focuses on identifying quality companies with strong profitability and shareholder returns, healthy governance, and attractive valuations. This requires deep fundamental analysis; environmental, social, and governance evaluation, and careful country and sector selection to help manage downside risk while capturing long-term growth opportunities.
Why emerging markets could outperform over the next decade
We believe that emerging markets may be entering a new era of sustained growth and investment leadership. Research from MSCI suggests that profitability, dividend yield, and investment quality are important long-term drivers of shareholder returns in EM equities.
With technological innovation accelerating, valuations remaining attractive, and global capital potentially rotating away from concentrated U.S. exposure, the authors believe emerging markets are positioned for a significant resurgence. In our view, the next decade may be the period when many emerging economies fully “emerge” as global economic and investment leaders.
Alpha measures the excess return of an investment vehicle, such as a mutual fund, relative to the return of its benchmark, given its level of risk (as measured by beta). Alpha is based on historical performance and does not represent future results.
Forward P/E ratio is a forward-looking perspective on a stock’s valuation. A lower ratio suggests the stock is undervalued relative to its projected earnings while a higher ratio suggests it is overvalued based on projected growth.
MSCI Emerging Markets Index (Net)
The Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index (Net) is a free-float-adjusted market-capitalization-weighted index that is designed to measure equity market performance of emerging markets. You cannot invest directly in an index.
MSCI World Index (Net)
The Morgan Stanley Capital International (MSCI) World Index (Net) is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index (Net) consists of the following 23 developed markets country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. You cannot invest directly in an index.
Standard & Poor’s 500 Index (S&P 500 Index)
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value. You cannot invest directly in an index.
Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
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