Why do experts think emerging markets will outperform?

Emerging market stocks celebrated one of their strongest years in recent history in 2025.

The MSCI Emerging Markets Index (an index of large- and mid-cap stocks from emerging markets) returned 33.6% during the year, its best annual return since 2017, compared to 21.1% for the MSCI World Index (which comprises global stocks from developed markets).

The emerging market rally may not be over either, as experts believe many of the tailwinds that drove last year’s success are still in play.

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Investors’ desire to diversify away from the US, a weak dollar and a potentially more dovish Federal Reserve are some of the key tailwinds working in emerging markets’ favour.

Mali Chivakul, emerging markets economist at J. Safra Sarasin Sustainable Asset Management, predicts that “2026 will be a year of net inflows into emerging market asset classes” and points out that, besides outflows from China, the year got off to a strong start.

The MSCI Emerging Markets Index gained 14.9% in the first two months of 2026, though they then fell slightly following the onset of hostilities in the Middle East.

Despite outperforming global counterparts over the last year, emerging market stocks remain attractively valued, and could benefit from a number of separate tailwinds this year.

“A lot of people are underweight emerging markets, if they are there at all,” Marcus Weyerer, director of ETF investment strategy, EMEA at Franklin Templeton, told MoneyWeek.

So if you haven’t got any exposure to emerging markets, and you’re considering where to invest, what makes them worth considering?

What is an emerging market?

The phrase ‘emerging market’ can be vague, especially for beginner investors. While there are various economic definitions, when discussing emerging markets in an investing context, we’re normally referring to the MSCI’s classification system.

This categorises economies based on the extent of their economic development, as well as the size and accessibility of their capital market. These second two factors are important because it means that several highly advanced economies (think China or South Korea) are designated as emerging markets thanks to the way their stock markets are regulated.

In Korea’s case this is mostly thanks to how its capital markets are regulated: for example, the fact that full currency conversion from the South Korean Won and short-selling are restricted.

“For a retail investor, [these restrictions have] almost zero implications,” says Weyerer.

But the upshot is that Korean equities are classified as emerging market stocks, which plays a part in their relative undervaluation.

Dollar weakness could support emerging markets

The US dollar index – which measures the strength of the currency against a basket of global competitors – fell around 0.4% during the first two months of 2026, and is down over 8% over the preceding 12 months.

“A weaker dollar is historically beneficial for emerging markets,” explains Weyerer. This is chiefly because emerging markets have approximately $4 trillion worth of dollar-denominated debt, which becomes cheaper to service in their domestic currencies when the dollar weakens.

This is compounded by the fact that the Federal Reserve (Fed) is cutting interest rates, which further reduces the cost of borrowing dollar assets.

This dynamic could be reversed, though, if the Middle East conflict remains protracted. That might encourage the Fed to slow its rate-cutting cadence, which would add strength to the dollar.

But for now the macroeconomic backdrop remains favourable to emerging markets going forward. “Although US dollar weakness remains a tailwind for the asset class, it is not the only driver for emerging market outperformance,” said Chris Tennant, portfolio manager of Fidelity Emerging Markets (LON:FEML). “Many emerging market economies benefit from increasingly sophisticated capital markets and therefore carry less dollar-denominated debt than in the past, meaning EM outperformance is not reliant on continued USD weakness.”

US diversification and low emerging market valuations

On a more micro level, emerging market stocks are valued more attractively than many global counterparts.

This is particularly true of US stocks, which have made a slow start to the year compared to global stocks.

“People are looking to diversify out from expensive US tech,” said Weyerer.

MSCI World is often viewed as the authoritative global stock market index, but it has no emerging market exposure at all, while US stocks comprise over 70% of the index.

“In the last year, people have realised that there's maybe more out there than just the US,” said Weyerer.

Emerging market stocks still offer AI exposure

The S&P 500 is heavily weighted towards AI stocks, with the Magnificent Seven megacaps accounting for over 30% of the index between them.

But investing in certain emerging markets still offers AI exposure, and generally at more favourable valuations.

Korea’s market in particular is heavily AI-dominated: Samsung Electronics (Seoul:005930) and SK Hynix (Seoul:000660) make up approximately 53% of the MCI Korea Index between them (as of 27 February).

Despite quadrupling in value in the 12 months to 27 February, Samsung’s stock trades at less than ten times its projected earnings (compared to around 23 for Nvidia). SK Hynix more than quintupled over the same period, but trades at less than six times its projected earnings.

Then there is Taiwan Semiconductor Manufacturing (NYSE:TSM) (TSMC), the largest stock in the MSCI Emerging Markets Index and key supplier to Nvidia, Advanced Micro Devices (AMD) and almost every AI company in the US. It’s fair to say, though, that TSMC is no longer a hidden gem; its forward P/E multiple is now higher than Nvidia’s at over 26 – but it underscores how reliant the broader AI ecosystem is on emerging market regions.

By investing in emerging markets, “you’re diversifying your AI trade out of the hyperscalers, to the companies that actually produce the chips those hyperscalers need for the data centres,” said Weyerer.

Sector diversification through emerging market stocks

The advantage of investing in emerging markets is that they provide sectoral diversification too. AI is represented, but it isn’t the dominant story in the way that it is in developed markets (which, effectively, means the US).

There is a diverse range of economies within emerging markets. While Korea and Taiwan are heavily technology-driven, India – the world’s largest country by population and one of the fastest-growing economies – has a much more domestically-focused stock market.

“If you look at the recent trade deals that India has clinched, maybe in five years, the economy will look quite different,” said Weyerer. “The big opportunity in India is consumption. You’ve got great demographics there.”

Many emerging markets also offer exposure to commodities like gold, silver and copper.

“Another key driver for the emerging market asset class is the increasingly ‘goldilocks’ type backdrop for commodity prices, with what could be continued strength in key mined commodities,” said Tennant.

“Resource-rich EMs have benefited from commodity price rises,” said Chivakul. “High gold, silver and copper prices have supported markets such as Chile, Peru and South Africa.”

How to invest in emerging markets

You could buy stocks like TSMC, Samsung or SK Hynix directly into your portfolio, if your broker allows it. This article on three emerging market stocks contains further inspiration for individual stock picks – but you may want to use a fund or investment trust to gain broader access.

A low-cost index fund tracking an emerging markets index, such as Xtrackers MSCI Emerging Markets UCITS ETF (LON:XMMS) or the Franklin Templeton FTSE Emerging Markets UCITS ETF (LON:EMER), is a simple means of gaining exposure.

Actively-managed emerging market strategies include investment trusts like Fidelity Emerging Markets, Templeton Emerging Markets (LON:TEM) or JPMorgan Emerging Markets Growth and Income (LON:JMGI), or active funds like Guinness Emerging Markets Equity Income Fund or the Invesco Emerging Markets ex-China Fund.