Analysts See Emerging Markets as Next Major Investment Shift
A consensus is building among analysts that emerging markets are poised for renewed investor interest. Factors like strong demographics, a growing middle class, and stretched valuations in developed markets are positioning these economies for potentially superior risk-adjusted returns in the next cycle.
A key catalyst is a potential weakening of the U.S. dollar, which can improve financial conditions in emerging markets and boost returns through currency appreciation. Following a strong 2025 where emerging market equities returned 34%, the MSCI EM Index has continued its positive momentum into the new year. Valuations present a compelling part of the investment case, with emerging market equities trading at a significant discount to U.S. and other developed market counterparts on both earnings and book-value metrics. Some analysts note that this is the largest valuation discount since the late 1990s. This suggests a wider margin of safety and potential for a re-rating as global conditions ease. Earnings growth is projected to be a major performance driver. Consensus estimates suggest emerging market earnings could grow 29% in 2026, more than double the 14% growth expected for the U.S. This acceleration is not just confined to technology but is broadening across multiple sectors. Investment in technology and artificial intelligence is a significant tailwind, as many emerging markets are central to the global IT and AI supply chains. Countries like Taiwan and South Korea are particularly well-positioned to benefit from the rollout of AI infrastructure and high-performance computing demand. A major divergence is occurring between China and the rest of the emerging market landscape. While China faces structural headwinds including a subdued property sector and weak private sector confidence, other nations are capitalizing. India is showing strong domestic demand, while Mexico and Southeast Asian countries are benefiting from supply-chain diversification. The risk profile for many emerging economies has seen structural improvement. Over the last decade, many have improved their external balances, increased foreign exchange reserves, and strengthened sovereign credit profiles. This has made them more resilient to shifts in U.S. monetary policy compared to the "taper tantrum" era of 2013. Monetary policy is also providing a tailwind, as many emerging market central banks are in a position to cut interest rates. Easing cycles in countries with high real interest rates, such as Brazil, are expected to stimulate consumer credit, housing, and financial activity.
