Emerging market stocks deliver strong growth at a bargain

The emerging-market bull isn’t back quite yet, but investors are seriously considering whether to set one running. Despite notable success stories such as India, when taken as a whole, emerging markets (EMs) have had a dispiriting 15 years as surging US stocks left fund managers with little reason to look elsewhere. Between 2009 and 2024, US equities returned an annualised 14.6% in dollar terms, almost double the 7.4% returns for emerging equities over the same period, says Jeff Sommer in The New York Times.

Yet Donald Trump’s tariff chaos has flipped the script. EMs returned a formidable 14.9% in the first half of 2025, compared with 5.8% for American shares. A brief, but frightening meltdown in US bond markets this spring is driving a reassessment of which countries are the real banana republics. The usual pitch for EMs is that they offer high growth potential, but with greater risk. Yet calculations from MSCI show that in foreign-currency terms, US public markets were actually more volatile than the average emerging market during the first half of 2025 (not news to anyone who checked their share portfolio during April’s fierce market crash).

Emerging markets gain credibility

Trump’s America isn’t the only developed nation coming in for scrutiny. “Post-pandemic, many EM central banks were quicker to raise rates than their developed-market counterparts,” says Devan Kaloo, global head of equities at Aberdeen Investments. “By contrast, several developed market central banks have seen their credibility erode, partly due to delayed policy responses and increasingly strained national balance sheets.” There has thus been a shift in “relative credibility”, with incremental improvements for EMs “versus continued erosion” in some developed markets.

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The last EM bull market came during the 2000s as Chinese growth powered up global commodity markets. Between 2001 and the end of 2009, the MSCI EM index climbed nearly 200%, compared with a miserable 4% in the developed world (courtesy of the dotcom and subprime crashes). A straightforward repeat of that golden age, with a rising Chinese tide lifting most EM boats, may not be on the cards again. The EM grouping has grown so diverse that differential performance during the next bull run seems inevitable. East Asian tech leaders, Latin American copper miners and Middle Eastern energy plays are unlikely to all enjoy a simultaneous boom.

If anything ties EMs together today, it is the financial logic that sets them up as a foil to US capital markets. When doubt sets in on Wall Street, EM funds are one of the natural outlets for redirected flows, in rather the same way that a local pub might enjoy an uptick in custom when a patron’s marriage starts to fail.

Historically, a fairly reliable rule is that EM assets will rise when the dollar falls. That correlation was apparently driven by simple financial logic: a cheaper dollar meant cheaper financing costs for EM sovereigns and companies. The growth and earnings outlook thus improved mechanically. Yet today firms in the developing world are increasingly able to borrow in their own currencies rather than taking on the currency risk of greenbacks.

You might have expected the inverse dollar-to-EM correlation to break down as a result, but it hasn’t, suggesting that global capital flows are a bigger factor than balance-sheet effects. Buying EMs may thus be one roundabout way of shorting an overvalued dollar.

Emerging market growth

For now, this year’s EM bounce might be more a symptom of global fund managers trimming their US exposure than the result of any sudden enthusiasm for South African miners or Polish energy plays. In the long term, a fresh EM bull market can’t run on fatigue with America alone.

The classic growth themes – a rising middle class, demographics, rapid economic growth – are still present, but they are no longer a given everywhere. Populations in East Asia are ageing, while much of Latin America stews in the middle-income trap. The need to pick winners and avoid duds makes a compelling case for using actively managed funds.

Kaloo highlights “three key structural developments: rising domestic consumption, technology as a platform, and the global shift toward electrification”. To play the first two, he points to Tencent, the operator of Chinese “super app” WeChat. “Tencent combines the strengths of global tech giants such as Spotify, Meta and Sony. Yet it trades at a significantly lower valuation, despite its strong exposure to some of the world’s fastest-growing consumer markets.” For electrification, he likes Kazakhstan’s Kazatomprom, which is the world’s largest uranium producer and stands to gain as “the pace of demand for energy is growing rapidly around the world”.

Another reason to favour funds is because the value created in emerging economies isn’t always captured on local exchanges. Fadrique Balmaseda, investment adviser to the Ashoka WhiteOak Emerging Markets Trust (LSE: AWEM) says that as of June this year, 11.6% of the portfolio is actually in developed-market shares. For example, “approximately a third of revenues” at LVMH and Hermès comes from Chinese luxury consumers, yet the shares are listed in Paris.

To secure broad exposure, there is the Fidelity Emerging Markets Limited Trust (LSE: FEML), which is up 21.5% this year and carries a 0.81% ongoing charge, and the Templeton Emerging Markets Investment Trust (LSE: TEM), which is up 21% and carries a 1.09% ongoing charge. Reflecting the underlying EM index, both are currently heavily invested in Asian tech plays such as Taiwan-based chipmaker TSMC.

Finally, some of the most intriguing growth stories in the developing world are not taking place in emerging markets at all, but in the even more peripheral “frontier” category. The BlackRock Frontiers Investment Trust (LSE: BRFI) offers exposure, with a notable weighting towards the Gulf states and Turkey.

Vietnam: a roaring – and cheap – Asian tiger

GDP per capita in the Southeast Asian tiger has risen more than fivefold since the mid-2000s, driven by an export-led manufacturing strategy. But Donald Trump’s re-election cast grave doubt on the nation’s growth plans. Vietnam has the third-largest trade surplus with the US of any country. When Trump threatened tariffs of 46% in April, local shares reacted with their worst day in 20 years. Economists made dire predictions of GDP shrinking as much as 4% – a severe recession.

Thankfully, last month, Hanoi pulled off a much better deal. The new 20% tariff (with the threat of 40% on Chinese “trans-shipments”) is hardly welcome, but it isn’t at a level that puts local factories out of the game. Most importantly, with its neighbours slapped with similar rates, there is little reason to think that Vietnam’s status as the region’s up-and-coming manufacturing hub is in peril. The local VN-index has rallied 17% since the US deal was announced on 2 July, and has gained 33% in a year. Concern has shifted to whether an “intense” bout of buying by local punters is sustainable, says Nguyen Kieu Giang on Bloomberg. Retail traders account for more than 80% of local market value, partly representing the absence of large institutional investors in a market that is still classified as “frontier” by index providers FTSE Russell and MSCI. Still, on 11.1 times forward earnings, Vietnam remains notably cheap compared with most regional peers.

And the holy grail might be drawing into view. “There are clear signals that an upgrade in FTSE Russell’s index hierarchy could be announced in September 2025, with official inclusion as early as March 2026,” says a recent report from Dragon Capital. That could unleash hundreds of millions of dollars in passive inflows from investors who track the EM index, and several billion from active funds. It could also pave the way for an even more game-changing upgrade to the MSCI EM index. Growth dynamics show no signs of slowing. “FDI, public investment and corporate earnings growth have all surprised on the upside, leading the government to revise its growth target from 8% to 8.5%”, says Thuy Anh Nguyen, director at Dragon Capital. Dragon Capital’s Vietnam Enterprise Investments Limited (LSE: VEIL) fund is tapping into the country’s expanding middle class through electronics retailer Mobile World Group (MWG). With grocery subsidiary Bach Hoa Xanh, MWG is capturing “the shift in consumer behaviour away from wet markets to convenient modern stores”.

VEIL has been London’s top-performing Vietnam-focused trust this year. Dynam Capital’s Vietnam Holding (LSE: VNH), which has more of a tilt towards smaller stocks, has returned an impressive 169% in five years. VinaCapital’s Vietnam Opportunity Fund (LSE: VOF) takes in a broader range of assets, including private equity.

India takes a breather

While Vietnam enjoys clarity over tariffs, India is still caught in the fog of the trade war. The White House has slapped the world’s most populous nation with eye-watering 50% tariffs, with half that total a punishment for buying Russian oil, and the other half in retaliation for New Delhi’s $45.7 billion goods surplus with Washington. A contrarian might spot a buying opportunity. Trump’s tariff bark tends to be worse than his bite. Some sort of deal seems likely to materialise once the sabre-rattling is done. Tariffs are a real irritant, complicating India’s hopes of becoming Asia’s next electronics-manufacturing powerhouse. But a vast internal economy means that only about 2% of GDP is derived from US exports. Trade battles with Washington simply aren’t the existential economic question for New Delhi that they are for Hanoi.

The real problem is that India’s stock market is losing steam. On a forward price/earnings (p/e) ratio of 22, Indian equities trade at a steep premium to the EM average of 13. Indian blue chips generally deserve these premium ratings. India is a tough place to do business, so the firms that rise to the top are usually very well managed.

Moreover, GDP is expanding at 6.5% a year. But high valuations are vulnerable when earnings disappoint, and that is what has happened recently. As Bharath Rajeswaran and Vivek Kumar M note in Reuters, earnings growth has been in single digits for five consecutive quarters, below the 15%-25% pace that got the current bull market going in 2020. There are suspicions that only determined local retail buying is keeping things afloat.

The local BSE Sensex has crawled 2.5% higher this year, lagging regional rivals. In a curious way, Indian shares now resemble those in America: a market with solid long-term prospects, excellent companies and overenthusiastic retail buyers that is losing steam against a backdrop of bad news and elevated valuations. And rather like America, long-term investors cannot afford to sit things out, even if the short-term set-up is less than encouraging.

The pound’s 11% rally against the rupee this year has left most London-listed India trusts underwater for the year to date. Abrdn New India Investment Trust (LSE: ANII) has lagged during India’s equity boom, but its conservative focus on large-cap, high-quality shares should provide some protection during periods of softness. The small and mid cap India Capital Growth Fund (LSE: IGC) has been a top performer, delivering a 171% gain over the past five years. India’s 5,000-plus universe of listed firms is a stern test of stockpicking ability, and with an average annual return of 15.3% stretching back to 2005, the team has a proven record.

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