What is an emerging market, and should you invest in them?
Emerging markets can be a great way to add diversification to your investment portfolio, but what is an emerging market, and is now a good time to buy into them?
Most investors with some experience will have heard about the opportunities available in emerging markets.
But the phrase can be vague and unclear, especially for beginner investors.
While there isn’t any single definition of an emerging market, the phrase usually refers to economies that are transitioning from being relatively undeveloped towards being a fully-fledged post-industrial economy with high standards of living.
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Investing in them can offer diversification away from developed regions like the US or the UK, where your portfolio may well have a lot of exposure by default, whilst still tapping into key themes like artificial intelligence (AI).
They are also strong performers. Morningstar data analysed by the Association of Investment Companies (AIC), an industry body representing UK investment trusts, showed that the average investment trust in the emerging markets sector returned 65% over the 12 months to 22 May, compared to 24% for the average investment trust.
“Emerging markets have benefitted from a weaker US dollar and strong earnings growth, as well as investors looking to diversify away from concentrated US markets,” said Omar Negyal, manager of JPMorgan Emerging Markets Dividend Income Trust.
The average emerging market investment trust has returned 60% over the last five years, and 257% over the last 10. The MSCI Emerging Markets Index returned 47% in the 12 months to 30 April 2026, compared to 29% for MSCI World (which tracks developed market companies) – though MSCI World has outperformed its emerging market counterpart over the last five and 10 years.
We take a closer look at what countries form emerging markets and how you can invest in them.
Which countries are emerging markets?
The closest thing to a universal definition of an emerging market is probably the International Monetary Fund’s ‘emerging market and middle-income’ classification, which applies to 40 countries. Some of the largest and most significant economies on this list are Brazil, Russia, India, China and South Africa, which collectively make up the ‘BRICS’ nations.
But for investors, a more relevant categorisation is MSCI, which divides national economies into five categories: developed, emerging, frontier, advanced frontier, and standalone markets. MSCI counts the following as emerging market economies:
Americas | EMEA | APAC |
|---|---|---|
Brazil | Czechia | China |
Chile | Egypt | India |
Columbia | Greece | Indonesia |
Mexico | Hungary | South Korea |
Peru | Kuwait | Malaysia |
| Row 5 - Cell 0 | Poland | Philippines |
| Row 6 - Cell 0 | Qatar | Taiwan |
| Row 7 - Cell 0 | Saudi Arabia | Thailand |
| Row 8 - Cell 0 | South Africa | Row 8 - Cell 2 |
| Row 9 - Cell 0 | Turkey | Row 9 - Cell 2 |
| Row 10 - Cell 0 | UAE | Row 10 - Cell 2 |
What are the characteristics of emerging markets?
While every emerging market is different (just as every country is different), the economic trajectory of emerging markets tends to lead to some general themes that are of interest to investors.
One of these is relatively fast economic growth rates. These countries tend to be increasing their standard of living, often from a fairly low starting point, and that gives high growth rates in terms of year-on-year percentages.
That often goes hand-in-hand with improving financial infrastructure. India, for example, has gone from a predominantly cash-based economy to the world’s largest digital payments market in less than a decade, thanks largely to investment in the unified payments interface (UPI) technology that underpins the country’s payments network.
Emerging markets also tend to have younger populations relative to developed economies, and often have rapidly improving standards of education.
And particular emerging markets can offer you exposure to large structural trends, without compounding your exposure to developed markets.
“South Korean and Taiwanese markets have both been lifted by the AI boom due to increased demand for semiconductors and memory chips,” said Negyal. Similarly, he added, “companies across Latin America have been supported by stronger commodity prices and increased demand for energy and resources.”
What are the risks of investing in emerging markets?
Many of the upsides of investing in emerging markets also come with additional risk compared to developed markets.
They can be impacted by geopolitical factors, such as the trade frictions that have existed between the US and China over recent years, while fluctuations in exchange rates can be challenging for emerging economies.
The war in Iran was a headwind for emerging markets, though the peace deal agreed between the US and Iran could reverse this.
“The US is likely to face elevated inflation, potentially causing the US Federal Reserve to raise interest rates,” said Jacqueline Broers, co-fund manager of Utilico Emerging Markets Trust. “This in turn, could strengthen the US dollar, weaken emerging market currencies and undermine the macro position of many emerging economies.”
Some emerging markets also have weaker corporate governance provisions compared to developed markets, which can increase risks for investors.
And similarly, the structural trends that are currently benefitting emerging markets could hinder them should they reverse.
“Any sharp reversal in the AI theme may lead to underperformance of tech-heavy markets like Taiwan and Korea,” said Hiren Dasani, chief investment officer at Ashoka WhiteOak Emerging Markets Trust.
Should you invest in emerging markets?
With all of these factors considered, is now a good time to invest in emerging markets?
This depends on the emerging market in question. As above, all are distinct and offer different risks and opportunities.
“Emerging market equities have also benefitted from lower valuations relative to developed markets,” said Broers. While this valuation discount persists, value investors will be attracted to the opportunities in emerging markets.
Ultimately you should decide whether or not to invest in emerging markets based on your circumstances and the makeup of your portfolio – but they could offer some diversification if you currently have no exposure.
How to invest in emerging markets
If you are considering investing in emerging markets, there are several ways to go about it.
You could choose a low-cost index fund that passively tracks an index. For example:
- iShares MSCI Emerging Markets ETF (LON:0JHF) which tracks the MSCI Emerging Markets Index,
- Vanguard FTSE Emerging Markets ETF (LON:0LMP) which tracks the FTSE Emerging Markets All Cap China A Inclusion Index.
For a more active approach, investors could select an emerging markets-focused investment trust such as Templeton Emerging Markets Investment Trust (LON:TEM) or Ashoka WhiteOak Emerging Markets Trust (LON:AWEM), both of which invest in long-term opportunities in emerging market economies.
Fidelity Emerging Markets Limited (LON:FEML) is an alternative option, and can invest up to 30% of its portfolio in short positions, typically when a business operates in a sector that is experiencing a structural decline and there is some sort of governance issue surrounding the company.
JPMorgan Emerging Markets Dividend Income Trust (LON:JEMI) and Utilico Emerging Markets Trust (LON:UEM) are emerging market investment trusts that focus on dividend stocks in emerging markets; UEM is a next-generation dividend hero, having raised its dividend payout for 10 consecutive years.
