Go for growth: how to invest in emerging markets

Basketboat tours in Bay Mau nipa palm forest, Vietnam

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Emerging markets (EMs) are back. The MSCI Emerging Markets index delivered a 31% return over the first ten months of the year, compared with just 18% from the developed markets-focused MSCI World index. Such outperformance has been a long time coming. Investors in emerging-market equities have not enjoyed higher returns than from developed markets in any year since 2020.

These equities provide exposure to countries surfing trends such as urbanisation and industrialisation, and exploiting demographic advantages, such as younger populations. At an earlier stage of their development, their potential is to grow more rapidly. In recent years, however, that story has played second fiddle.

Amid global economic and political disruption, investors have steered away from equity markets perceived as being riskier. The strength of the US dollar – a safe-haven asset – has been a major challenge for many developing economies with significant dollar-denominated debts. And the travails of individual markets – including China, where a debt crisis has caused major problems – have dragged returns down.

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Those headwinds now appear to be receding. The dollar has weakened notably this year, with the US reducing interest rates. That has directly benefited EMs, but also had an indirect effect, with lower returns from safer assets such as fixed-income instruments prompting investors to embrace securities that carry more risk. “A weaker dollar typically boosts purchasing power, making imported goods cheaper, and it often lowers the cost of capital,” explains Robert Marshall-Lee, chief investment officer of Cusana Capital. “This stimulates growth, investment and earnings.”

Attractive valuations have also helped win investors round. The MSCI Emerging Markets benchmark’s current constituents are priced, on average, at about 14 times their forecast earnings for the next year, compared with 23 times for the typical US stock. Goldman Sachs therefore hopes that EMs’ rally will endure. Its optimism reflects shifting macro trends, but also the strong earnings performance of many emerging market-based technology companies, which are benefiting from the AI boom.

The outlook for emerging markets in 2026 also looks bright. “The fundamentals of emerging-market economies look sound,” says Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equities Fund. “[Firms’] conservatism has strengthened their balance sheets; this, alongside supportive valuations, puts them on a good footing to deliver better growth.” Such positives have the potential to drive the outsized returns that investors are often promised from EMs. Research published earlier this year by Amundi forecasted average annual returns from emerging-market equities of 7% – against 6.4% from Europe and 5.6% from the US.

The Amundi report includes higher forecasts for individual markets – notably India, where it predicts a 7.4% average annual return over the next decade. “It offers high-quality, well governed franchises with extensive growth [prospects],” adds Marshall-Lee.

In China, Amundi expects a more modest 6.8% a year. Key AI players such as DeepSeek and Alibaba have helped Chinese equities to perform more strongly in 2025. But there are concerns about the ageing population and its slower productivity and growth. Vietnam could be another interesting market. Reforms designed to boost the private sector, a strong domestic economy, and a wave of companies joining the stock market are all attracting attention.

One big question for many developing countries, however, is the extent to which US trade tariffs will hit growth. Still, the tariffs story varies by country. President Donald Trump has most recently focused his attention on India, threatening the country with an additional 25% penalty if it continues to buy oil from Russia, in addition to the existing 50% tariff already imposed. By contrast, hopes are rising of a trade deal with China. And relations with other emerging markets are warm.

Emerging markets: where to invest

Stay focused on the big picture, says Alex Watts, senior investment analyst at the investment platform Interactive Investor. “Emerging markets are underrepresented in global indices versus their contribution to world GDP and populations,” he points out. A well-diversified fund can help investors manage risk while accessing professional expertise in key markets. “For a very broad and low-cost approach, the Fidelity Index Emerging Markets fund is a passive option with a charge of just 0.2% a year,” notes Watt. Highly rated active funds also offering a broad exposure include JPM Emerging Markets Fund and the Templeton Emerging Markets Investment Trust (LSE: TEM).

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.