From cyclical recovery to structural opportunity—why emerging markets look different this time

Emerging markets (EMs) have lagged global indexes for over a decade due to structural challenges that have slowed growth, contributed to inflation, limited policy options and weakened corporate performance.

As investor attention turns to 2026, we believe EMs have finally entered a phase in which macro conditions, policy flexibility and corporate behavior are aligning in exciting ways, that could drive a sustained improvement in earnings quality and capital efficiency. The outperformance of EM equities during 2025 is evidence of this.

Powerful global themes such as artificial intelligence (AI), de-dollarization¹ and trade dynamics are reinforcing this transformation, changing the accepted investment calculus and increasing the prominence of EM assets in allocation decisions.

This is all happening at a time when EM equity valuations appear inexpensive relative to their developed market (DM) counterparts. On a 12-month forward basis, the FTSE EM Index trades at 15.7 times earnings, a 31% discount to DMs.²

As we discuss in this paper, EMs are entering a new phase in which macro-stability, policy flexibility and structural reform are aligning with major global paradigm shifts to drive growth. AI demand, de-dollarization and supply-chain reorientation are all helping to increase the importance of EMs to investors, a trend underpinned by improving earnings quality, stronger balance sheets and more durable growth transmission.

For EM equities, the opportunity centers on rising returns on equity and falling costs of equity. Governance reforms, disciplined capital allocation, increased dividends and ongoing buybacks are enabling a potential valuation uplift. For EM debt, the appeal lies in disinflation, improved policy credibility, stronger fiscal positions and declining tail risks. These dynamics support carry, duration upside and tighter spreads, especially in local-currency markets.

We believe the recent strength of EMs has led to some pockets of overvaluation and concentration risk, particularly among mega-cap technology names, but significant value remains across the asset base. Active management can help access that value and deliver positive returns for investors who have EM exposure within their portfolios.