For much of the past 15 years emerging markets have disappointed investors, consistently underperforming developed markets and reinforcing scepticism about their long-term appeal. However, recent market behaviour is beginning to challenge that view.
In 2025, the US underperformed non-US markets by the widest margin since 2009. In dollar terms the MSCI emerging markets index gained 33.6% while the JSE delivered a 62% return — its strongest calendar-year performance since 2009.
The outperformance of emerging markets is not without precedent. After the bursting of the tech bubble in 2000 emerging markets outperformed US equities for much of the subsequent cycle.
The shift has therefore revived a question for global investors: does recent US underperformance reflect a temporary pause or the early stages of a more durable move away from US exceptionalism?
The global backdrop has changed in ways that matter for capital allocation. Competition for resources, critical minerals and technological capability has intensified, increasing the strategic importance of commodity ownership. Emerging markets are better positioned than in previous cycles, particularly as demand rises from AI, digitalisation and the energy transition.
Demand for precious metals — led by gold — has strengthened as geopolitical realignments and changing national security priorities prompt central banks to diversify reserves. A weaker dollar, with higher commodity prices, has also improved the terms of trade for some emerging economies.
Macroeconomic fundamentals are more supportive than commonly assumed. Public debt ratios across much of the emerging market universe are generally healthier than those in several developed economies, while prospective US interest rate cuts should ease financial conditions for emerging market currencies.
Median emerging market GDP growth is forecast to exceed that of developed markets, with inflation increasingly converging toward developed-market levels. These improved fundamentals are reflected in emerging market bond yield spreads versus US treasuries, now near decade lows.
Rising intra-emerging-market trade has reduced reliance on developed market demand — reflected in the MSCI emerging markets index now having lower international sales exposure than some developed-market peers — and this greater external resilience, evident during recent US–China trade tensions, supports a structurally lower risk premium for select emerging market equities than in previous cycles.
Less appreciated is the shift in relative policy stability. Policy volatility in the US — particularly under the Trump administration — has begun to resemble patterns long associated with emerging markets. Predictable policymaking underpins long-term capital allocation. When it weakens, regulatory certainty, contract enforcement and investment planning suffer. These are not abstract concerns: they shape corporate behaviour, influence risk premiums and affect returns.
Emerging market equities have also been penalised for weak capital efficiency. That disadvantage is now narrowing. While US companies still lead on return on invested capital (ROIC), much of that edge is concentrated in the “Magnificent Seven” — among the most competitively advantaged firms yet created. Adjusted for their outsized effect, emerging-market ROIC is now broadly comparable with that of the rest of the US market.
This improvement is genuine. Across operating margins, return on assets and return on equity, emerging market companies in the MSCI all country world index have made meaningful gains over the past decade. Corporate balance sheets have strengthened with lower leverage and greater financial resilience.
In some emerging markets, governments have also begun to support more shareholder-friendly initiatives — an incremental but important signal of improving capital discipline. What differentiates this cycle is not new tailwinds, but the cumulative effect of stronger balance sheets, more disciplined capital allocation and broader earnings drivers, making outcomes less fragile than in past episodes.
None of this guarantees sustained outperformance. Emerging markets remain diverse and vulnerable to policy errors and geopolitical shocks. But the balance of risk has shifted.
Yet these improvements have not translated evenly into market performance. What stands out is not a broad recovery across emerging markets, but growing differences in outcomes. Some countries, sectors and companies are doing well while others lag — even within the same market. In many cases, share prices have overtaken earnings, creating wide gaps in valuations and returns. Success thus increasingly depends less on owning the market and more on identifying where prices have raced ahead of fundamentals.
Leadership within emerging markets is also broadening. Performance is no longer driven by a narrow set of technology or commodity themes, but by a wider mix of sectors and regions — including infrastructure, healthcare, advanced manufacturing and defence — pointing to a more diversified and durable set of earnings drivers.
Developed markets have become increasingly concentrated in a small number of dominant global franchises, raising the opportunity cost of diversification just as emerging markets are offering a broader, more varied set of improving return drivers.
Despite these shifts, global allocations to emerging-market equities remain well below historical norms. The opportunity is not uniform and is less about broad exposure than selective investment in countries and companies with stronger balance sheets, better governance and improved capital discipline.
Valuations remain attractive and consensus forecasts point to solid medium-term earnings growth, supported by economic expansion, urbanisation, automation and a growing middle class. At 13.4 times forward price-to-earnings, the MSCI emerging markets index remains at a significant discount to the S&P 500’s 22.1 times. This pricing reflects persistent investor scepticism despite fundamental improvement.
For long-term investors this is not a short-term timing call but a structural portfolio decision. The case for emerging markets increasingly rests on patient capital compounding alongside sustained improvements in corporate quality, innovation, consumption and governance — trends that play out over years, not quarters.
None of this guarantees sustained outperformance. Emerging markets remain diverse and vulnerable to policy errors and geopolitical shocks. But the balance of risk has shifted. Downside risks are better understood and more widely priced, while upside potential is increasingly linked to structural improvements rather than cyclical hope.
From a capital allocation perspective, the risk-reward trade-off for emerging-market equities relative to developed markets appears more favourable than it has been in many years.
• Salaam is chief investment officer at Vunani Fund Managers.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.