The year 2025 saw emerging market equities awaken after a long period lagging developed markets.
In sterling terms, the MSCI Emerging Markets index returned 24.25%, ahead of the MSCI World’s 12.75%. Over five years, however, emerging markets have trailed behind developed markets.
As Aubrey Capital Management portfolio managers John Ewart and Andrew Dalrymple note, the question is whether this performance marks a one-year wonder or an inflection point in EM fortunes.
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“At the macro level, as US interest rates decline and the US dollar weakens, emerging market central banks can adopt a looser monetary policy without jeopardising their currencies, provided inflation is under control,” the Aubrey managers say.
“Almost all emerging market countries are large importers of oil, and while the oil price remains subdued, the opportunity to adopt more accommodative monetary policy is considerable.
“This points to a significant investor shift towards emerging markets, primarily driven by opportunities at various stages of consumption for over half the world’s population, ranging from e-commerce businesses offering quick delivery to busier households, through to service and product offerings that improve lifestyles.”
Roddy Snell, an investment manager in the emerging markets equity team at Baillie Gifford, went as far as saying: “I think we’re possibly at a major inflection point where we’re going to have a golden period for the region, and it could well be one of the best performing regions over the next five to 10 years.”
In a research note, Amundi head of investment institute Monica Defend, group CIO Vincent Mortier and deputy CIO Philippe D’Orgeval say emerging markets remain a relative bright spot as developed economies wrestle with debt and policy uncertainty.
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Broadening market
Similar to developed markets, AI enthusiasm was a key driver of returns in 2025, particularly in markets such as Korea and Taiwan.
Mike Sell, head of emerging market equities at Alquity Investment Management, expects other factors to carry emerging markets moving forward.
“We think the market will very much spread out, and you’ve seen investors get an appetite for emerging markets for the first time in years. It is not just the AI names, it moves into names that benefit from digitalisation, demographics, the shift from the informal to the formal sector.”
Sell highlights India as a standout example: “India has a structural story, but that’s overshadowed by bright, shiny things elsewhere. We don’t expect AI to stop doing well, but is it going to double again? I don’t think it does. I think we’re going to see rotation into areas like India and also into some of the smaller markets.
“The Philippines is at multi-decade lows in terms of valuations,” he adds. “Egypt has had a really bad crisis. It’s now come out of that, and there are some really interesting stocks there. Greek unemployment is at an 18-year low.
“I think we certainly will see the broadening out of a domestic structural story, and smaller stocks, smaller markets, will gain more favour than they have done, but overall we’re very positive for the outlook for emerging markets for the next year.”
China
As the largest emerging market, focus will also be on whether China can continue on its upward trajectory after a tough few years from a markets perspective.
“We believe China is gradually moving in the right direction, and we expect more actions to come,” says Man Group head of Asia (ex-Japan) Andrew Swan.
“As a result, stocks that potentially could benefit from more balanced growth, which China wants to achieve with a pivot to a more consumption-oriented economy, have not had that support yet.”
China’s ruling party held its Fourth Plenum in October, which provided clues as to the country’s Five-Year Plan for 2026-2030. Swan said the meeting gave enough reason to remain optimistic that China is working on a solution to balance its economy.
“There was lots of language around growing consumption as a share of GDP. So far there has been a slight lack of policy and execution, but the government will outline the details of the five-year plan in March. If structural reform is delivered, then the goals it is setting out can be achieved.
“The plan will also see the government leaning into the private sector to establish leadership in key industries. We expect AI adoption to grow very quickly. After years of coordinated infrastructure investment, China has spare power capacity, which the West desperately needs and wants. China has it already and it is building faster than anyone else.”
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As a result, Swan is most interested in AI-adjacent companies, such as those providing data centre infrastructure.
“In the long term, we remain confident that China is in the early stages of its rotation towards a more balanced, consumption-orientated economy. In the short term, weaker data points suggest a slowdown in confidence.
“However, if we see a China policy pivot in the New Year, and interest rate cuts in the US, it should be a great environment for Asia to start to grow profitability again, which can lead to upward earnings revisions. The companies and the sectors which would potentially benefit from China’s reflation, and lower interest rates, have not moved yet, and we believe that’s where the opportunity lies for next year and beyond.”
