Beyond the myths: The case for investing in emerging markets

This article explores how emerging markets have evolved in recent years, challenging conventional narratives. With stronger fiscal frameworks and dynamic, innovation-led sectors, the case for revisiting emerging market allocations has arguably become more compelling.

Global investors are increasingly turning their attention to emerging markets (EM) where reform momentum, deeper capital markets and favourable demographics are reshaping the opportunity set.

These large and dynamic economies offer a compelling mix of high-growth potential, sectoral and regional diversity, and attractive valuations – all of which could make them a strategic component in long-term portfolios.

Coined in the 1980s, the term ‘emerging market’ covers a diverse universe of countries, spanning the globe. EM economies were previously considered a coherent grouping, with several shared traits, notably high levels of economic growth driven by industrialisation and commodities. They were also associated with fragile institutions, political and economic instability and greater volatility and risk.

While some of these issues remain, such as greater volatility in growth and inflation dynamics, these perceptions are arguably somewhat outdated and do not reflect the true picture of EM today.  

Although there are still risks in EM, the reward profile is hard to ignore, in our view, making a powerful case for investors to consider increasing their allocation to an asset class that has historically been overlooked.

The world’s growth engine

A key characteristic of emerging market economies is that they are underpinned by positive growth momentum, which has potential to continue given a number of structural shifts underway.

These include expanding middle classes fuelling consumption; urbanisation and infrastructure investment creating new economic hubs; and technology adoption accelerating productivity. 

Robust economic growth has been and remains one of the main attractions of investing in EM, as it provides a powerful tailwind for company earnings growth. 

In recent decades, emerging and developing economies have been consistently outgrowing developed markets (DM), with this trend likely to continue; EM are predicted to grow just over 4% between 2025 and 2026, compared to just 1.5% in advanced economies¹.

“Robust economic growth…remains one of the main attractions of investing in EM.”

In recent decades, EM have become an increasingly important part of the global economy. S&P Global expects EM to drive roughly 65% of global economic growth in 2035, stating that these countries are at the epicentre of some of the world’s most transformative megatrends².

‘New economy’ leaders

Where they were once considered laggards, EM are now home to economic powerhouses which are leading the charge in the industries of the future. While commodities are still significant for economies such as Brazil and South Africa, EM are also recognised for advances in areas such as e-commerce and artificial intelligence (AI).

Asia, in particular, is a leader in technology and innovation, keeping up with and, in some areas, moving ahead of DM. For instance, the release of the DeepSeek AI model in early 2025 revealed China’s progress in AI.

However, China is also at the forefront of battery technology, the leading producer of solar panels and increasingly setting the pace in electric vehicles and autonomous driving. This reveals how China’s economy has changed in recent years, with a new emphasis on innovation-led development.  

Technological advances can be found across EM. In particular, digitalisation is transforming the landscape. Mobile-first ecosystems are enabling rapid adoption in digital payments and extending access to credit, which is increasing the formalisation of business and boosting productivity. When it comes to tech adoption, in many places, EM are leapfrogging DM.

EM therefore offer investors exposure to a broad range of secular drivers that not only includes the traditional theme of urbanisation but also digitalization and energy transition. Despite the growing importance of EM in the global economy and the prominence of emerging market companies in ‘new economy’ sectors, EM generally remain underrepresented in global indices. For instance, emerging market equities are only around 11% of the MSCI ACWI Index, a global benchmark; they are also typically an even smaller part of most investors’ portfolios³.

“EM generally remain underrepresented in global indices.”

Because EM are overshadowed by DM, and the US in particular, investors are likely to be missing out on strategic long-term opportunities and future trends.

The demographic tailwind

The emerging market growth story also benefits from a more positive demographic impulse. 85% of the world population lives in EM, with many countries benefiting from ongoing population growth and more attractive demographics than DM.  

This creates growth momentum, with a larger working age population, as well as stronger potential for domestic consumption, particularly as the middle class expands. The middle class population in EM is set to double over the next decade, expanding from 354 million households in 2024 to 687 million by 2034⁴, providing a strong growth driver.  

A growing middle class underpins long-run consumption in housing, healthcare, education, travel and digital services. Companies serving these needs - whether domestic champions or local arms of multinationals – can enjoy long demand runways as penetration rates converge with global norms. 

Meanwhile, developed market economies are grappling with the additional strain of a declining workforce and an increased burden of an ageing population on government debt.  

An evolving asset class

Change is an inherent aspect of EM. From ‘emerging’ economies, characterised by idiosyncratic political and economic difficulties, this universe has now evolved into a promising asset class supported by positive growth momentum, strong macroeconomic credentials, globally competitive and innovative companies, and an attractive risk/reward profile. 

Today, EM experience levels of volatility that are similar to those of DM largely thanks to improved monetary and fiscal frameworks, increased exchange rate flexibility and stronger debt profiles.

For example, in recent years, emerging market central banks, well-versed in managing bouts of inflation, have increased their credibility: they reacted quickly to the post-covid inflationary bout, while central banks in DM were afflicted by indecision.

No longer are EM just reactive to US monetary policy, they have built reliable, credible frameworks. For example, in the latest monetary tightening cycle, Brazil’s central bank hiked rates 12 months before the first move by the US Federal Reserve (Fed).

As a result, the inflation trend has inverted for the first time: headline inflation⁵ is falling faster in EM than in DM⁶. This shift is not only supportive to emerging market bond markets but also helps narrow the risk gap in equity markets. 

It's not just central banks in EM that have flipped the narrative. Emerging market governments are beginning to be characterised by sensible fiscal policy and stability, at a time when DM are increasingly plagued by fiscal woes. The average debt-to-GDP ratio of emerging market and middle-income economies is 73%, whereas that of advanced economies is 110%⁷. Stable debt levels create a buffer to absorb global shocks, and EM appear increasingly resilient.

This is supported by other recent trends within EM whereby there has been a broad improvement in foreign currency reserves, with the significant increase in local currency debt markets allowing for even greater stability and autonomy.

“No longer are EM just reactive to US monetary policy, they have built reliable, credible frameworks.”

Historically, the fortunes of EM have generally been seen as closely linked to the strength of the US dollar and US interest rates – higher rates and dollar appreciation can attract capital flows away from EM to the US. But as EM have matured, the impact of these factors has arguably diminished and they are less susceptible to developments in the US today. Nevertheless, the performance of the US dollar remains an important consideration for EM investors, particularly in relation to emerging market debt.

The evolving corporate story

Not only is the sovereign picture more positive for EM, the credit quality of the corporate universe has also been steadily improving.

Emerging market companies can be characterised by more favourable debt metrics with lower net leverage levels (borrowing) and stronger interest coverage ratios. For investment grade corporates, on average, leverage is less than 1x versus close to 3x in DM. Even in the high yield space, debt metrics compare favourably to Western counterparts.

Indeed, in 2025 defaults in emerging markets fell to their lowest level since 2017, painting a positive fundamental picture⁸. As a result, the risk/reward profile of corporate debt in EM arguably looks more attractive than that of DM.

It is not just from a debt perspective that EM have been improving. Emerging market companies have become more appealing to equity investors in recent decades too as corporate governance standards generally have been rising. 

Company management teams are becoming more professional, firms are making better capital allocation decisions and there is now a greater focus on the ‘bottom line’ and profitability, rather than top-line revenue growth.

Significantly, the interests of shareholders are increasingly being recognised. This is particularly important in EM, where there have historically been large numbers of state-owned and family-controlled companies that are not always aligned with minority investors. In recent years, firms have become more shareholder friendly, which can be seen in the increase in dividends and share buybacks, especially in places like China⁸.

Despite the improvement in underlying fundamentals, opportunities are likely to remain in EM as it’s generally a less well understood asset class. The perception of EM as a volatile and unstable place is an enduring one that influences a lot of investor thinking about the asset class.

Sentiment towards EM often gets exaggerated both positively and negatively, partly because there is a gap between perception and reality. This aspect of investor psychology can provide opportunities for disciplined, long-term investors with expertise and capabilities in EM to take advantage of dislocations where valuations diverge from fundamentals.

“Firms have become more shareholder friendly, which can be seen in the increase in dividends and share buybacks.”

The EM mosaic 

EM are often spoken about as a distinct asset class but in reality they are far from uniform – they represent a mosaic of economies with distinct profiles and growth drivers.

The asset class encompasses more than 70 countries across Asia, Africa, Latin America, and emerging Europe. Part of the appeal of this heterogeneous grouping is that each region offers unique opportunities.

This diversity means an active investor can tap into multiple themes – from technology innovation and consumer demand to energy and infrastructure – while benefiting from varied economic cycles and regional resilience.

The importance of this diversification advantage was highlighted in 2025 by the introduction of tariffs by US President Donald Trump. Far from imposing blanket tariffs across the world, they varied significantly, both by size and impact.

For example, Brazil, despite facing a high tariff rate of 50%, is relatively insulated due to its low export-to-GDP ratio and domestically focused economy. India is in a similar position, whereas Vietnam, with a lower 20% tariff following a trade deal with the US, may be more exposed given its larger trade footprint and deficit with the US.

Growth levels could experience a boost in the post-tariff paradigm, where emerging market manufacturers move to ‘near-shoring’ or ‘friend-shoring’⁹, or buoyed instead by domestic markets or intra-regional trade.

Portfolio diversification

Furthermore, the breadth of the accessible EM universe, encompassing nearly 100 countries, ensures that despite country-specific growth risks as a result of tariffs, there is plenty of room for diversification.

More than anything, the tariff turmoil threw into question the long-accepted notion of “American exceptionalism”, increasing the impetus to diversify portfolios. With EM offering a diverse spectrum of long-term opportunities across markets that perform well at different times, this inherent strength can be very valuable for active investors.

Moreover, exposure to EM can diversify portfolios otherwise concentrated in a narrow set of developed market leaders. In periods when DM exhibit style concentration, investing in the asset class may help broaden participation across different economic cycles. 

EM: Resilient, diversified, and built for the future 

EM offer investors more than just growth — they can provide diversification, resilience, and access to structural trends shaping the global economy. With stronger fiscal frameworks, deeper local markets, and dynamic sectors like technology and green energy, these regions look well positioned for long-term opportunity.

Adding EM assets to a portfolio can potentially enhance returns, reduce concentration risk, and tap into the demographic and innovation-driven forces that will likely define the next decade of investing.

¹ International Monetary Fund, ‘World Economic Outlook: Global Economy in Flux, Prospects Remain Dim’, (imf.org), October 2025.
² S&P Global, ‘Emerging Markets: A Decisive Decade’, (spglobal.com, October 2024.
³ Dodge & Cox, ‘Emerging Markets: Why and Where’, (dodgeandcox.com), May 2024.
⁴ Oxford Economics, ‘The future of the middle class in emerging markets’, (oxfordeconomics.com), October 2024.
⁵ As measured by the Consumer Price Index.
⁶ M&G, Bloomberg, November 2025.
⁷ International Monetary Fund, ‘Gross debt position’, (imf.org), April 2025.
⁸ S&P Global, ‘Default, Transition, and Recovery: U.S. Leads 2025 Drop In Global Corporate Defaults’, (spglobal.com), January 2026.