The Rise of Emerging Markets: New Frontiers for Investment

In a world of economic transformation, emerging markets stand as beacons of opportunity, ready to reshape investment horizons with dynamic growth and innovation. Constructive and selective outlook for 2026 sets a promising stage, inviting investors to explore new frontiers beyond traditional developed markets.

These markets are not merely catching up; they are pioneering change through resilience and technological leaps. Supported by cyclical and structural tailwinds, EM equities offer a compelling narrative for portfolio diversification and long-term gains.

The journey ahead blends excitement with caution, as savvy investors navigate this evolving terrain. Outpace developed markets meaningfully in GDP growth, making EMs a focal point for future wealth creation and global impact.

Key Investment Thesis and Outlook for 2026

The 2026 emerging market outlook is characterized by robust fundamental support. Cyclical factors like a weaker U.S. dollar and improving earnings fundamentals drive this positive momentum.

EM economies are projected to grow by 4% annually in 2025 and 2026. This growth is underpinned by stronger demographics and rising domestic consumption.

Investors can expect a blend of opportunity and selectivity. The investment case rests on durable long-term growth drivers that promise sustained returns.

Valuation Advantage

EM equities trade at a sizeable discount to the U.S. and other developed markets on key metrics. This valuation gap presents a strategic entry point for discerning investors.

Global portfolios remain heavily concentrated in U.S. mega-caps. 2026 offers scope for EMs to play a more prominent role, capitalizing on below benchmark weights in allocations.

Chinese equities, in particular, show potential for re-rating. Clearer policy support could unlock value, making this a watchful area for growth.

Structural Growth Drivers

Corporate earnings across EM are being reshaped by distinct structural factors. Five primary themes dominate this transformation, offering diverse investment avenues.

• Global supply chain diversification
• Artificial intelligence and semiconductor capital expenditure
• Rising adoption of digital platforms
• Energy-transition investments
• Leadership in AI-related supply chains and technology

AI represents a central investment theme with transformational potential. The opportunity extends beyond direct semiconductor beneficiaries to broader supply chain players.

Markets like South Korea and Taiwan are key drivers, benefiting from AI infrastructure rollout. This positions them for significant earnings growth in the coming years.

Regional Opportunities and Divergences

A central axis of EM investing is the divergence between China and the rest of EM. China faces structural headwinds such as a subdued property sector and demographic pressures.

In contrast, other regions offer high-growth prospects. India delivers strong domestic demand momentum and policy reforms, reinforcing its durable growth story.

Mexico is a compelling beneficiary of near-shoring dynamics. Its strategic proximity to the United States enhances its appeal for supply chain shifts.

Brazil is well-positioned for cyclical recovery with accommodative interest rates. Upcoming elections in 2026 add both opportunity and potential volatility.

Southeast Asia benefits from supply-chain diversification. South Korea and Taiwan remain indispensable to global technology supply chains.

• India: Reform momentum and resilient consumer demand
• Mexico: Near-shoring and U.S. proximity
• Brazil: Improving macroeconomic stability
• Southeast Asia: Supply-chain diversification benefits
• South Korea and Taiwan: AI and semiconductor demand leadership

Macroeconomic Backdrop

A weaker U.S. dollar could support higher EM returns through currency appreciation. This is likely if the Federal Reserve cuts rates further in 2026.

Many EM central banks are easing monetary policy to boost domestic demand. Policy easing and domestic reforms persist across key markets, enhancing stability.

Inflation trends remain benign in most EM economies. Subdued food and energy prices contribute to this favorable environment.

Sector Opportunities

Performance has broadened beyond information technology to include materials, industrials, and healthcare. This diversification reduces risk and enhances portfolio resilience.

Recommended exposure areas focus on high-quality opportunities. Investors should target sectors aligned with global structural themes for optimal returns.

• Core exposure to high-quality manufacturing companies in North Asia and India
• Quality growth names in Brazil and Mexico with attractive valuations
• Defensive quality companies in healthcare and consumption sectors

These sectors act as ballasts against market volatility. They offer growth potential while mitigating downside risks in uncertain times.

Risk Factors and Challenges

Earnings revisions are improving but remain uneven across EM. Uneven earnings revisions anchor performance in tech and AI proxies, while other sectors lag.

Geopolitical surprises pose significant downside risks. Trade tensions and conflicts can disrupt growth, requiring vigilant monitoring.

Inequality and sustainability concerns are critical long-term issues. Benefits from AI and trade patterns must be shared to ensure inclusive growth.

• Earnings uncertainty in non-tech sectors
• Geopolitical and trade risks from global rivalries
• Inequality and job creation challenges
• Sustainability concerns in resource management

Investors should adopt a balanced approach to navigate these challenges. Mitigating risks through diversification is key to sustainable success.

Capital Flow Dynamics

Investor allocations to EM remain below benchmark weights, creating opportunities for capital reallocation. Light positioning suggests scope for increased inflows in 2026.

Capital flows are attracted by sound policies and risk diversification desires. Sustainable investment funds have outperformed, highlighting a shift towards responsible investing.

This trend is expected to continue, benefiting regions like emerging Asia. AI-related investments drive much of this momentum, aligning with global themes.

Forward-Looking Investment Considerations

A selective approach required for optimal EM investing in 2026. Focus on markets with credible reform stories and strong domestic demand.

The opportunity set has broadened to include AI infrastructure and advanced manufacturing. Long-term themes shape investment strategies for sustained growth.

• Leadership in AI-related supply chains and technology
• Digitalization and premiumization of consumption
• Healthcare advancements and energy-transition investments

Investors should embrace these frontiers with confidence and pragmatism. By leveraging structural advantages and managing risks, emerging markets can unlock transformative potential for portfolios worldwide.