Executive summary
Emerging markets (EMs) are transitioning from a cyclical rebound to a more structural growth phase, supported by improving macro stability, stronger corporate governance, and favorable global dynamics. This shift is enhancing earnings quality and capital efficiency, positioning EM assets for more sustained investor relevance.
For institutional investors, the opportunity lies in a combination of discounted valuations, rising return on equity, and improving policy credibility.
What is changing in emerging markets today?
Emerging markets are evolving from historically volatile, externally driven economies into more balanced systems supported by domestic demand, policy flexibility, and structural reform.
For much of the past decade, EMs lagged developed markets due to inflation volatility, limited policy independence, and weaker corporate discipline.
That dynamic is now shifting.
Today’s EM environment is characterized by:
- More stable inflation trends
- Greater central bank credibility
- Stronger domestic growth engines
- Improved corporate governance
This combination suggests a transition from short-term recovery cycles toward longer-term structural opportunity.
What is driving this structural shift?
The transformation in emerging markets is being driven by a convergence of global themes, domestic policy improvements, and corporate behavior changes.
1. Technology and AI integration
EMs—particularly in Asia—are central to global AI supply chains and deployment.
- Taiwan dominates advanced semiconductor manufacturing
- South Korea leads in memory and high-bandwidth chips
- China is scaling AI into real-world applications (logistics, e-commerce, automation)
This positions EMs not just as participants, but as infrastructure providers in the AI ecosystem.
2. Supply-chain reconfiguration
Geopolitical fragmentation is redistributing global manufacturing.
- Nearshoring and diversification are boosting investment in:
- India
- Mexico
- Vietnam
This broadens EM growth beyond commodities and single-country dependence.
3. Disinflation and policy flexibility
Lower inflation is enabling EM central banks to prioritize growth rather than stabilization.
- Inflation is trending below expectations across many EM economies
- Governments have more fiscal space than in prior cycles
- Domestic demand is reducing reliance on exports
This allows:
- More independent monetary policy
- Targeted stimulus
- Greater resilience to external shocks
4. De-dollarization and currency dynamics
A weaker US dollar environment is structurally supportive for EM assets.
- Reduces debt servicing costs
- Improves capital access
- Supports local currency appreciation
It also enhances USD-based returns for international investors holding EM assets.
Why does this matter for investors?
Emerging markets are becoming more attractive not just because of growth, but because of improving quality of that growth.
Historically, EM investing required accepting:
- Higher volatility
- Lower governance standards
- Less predictable earnings
That trade-off is changing.
Key improvements:
- Earnings quality is rising
- Return on equity (RoE) is improving
- Cost of equity is declining
- Capital allocation is becoming more disciplined
Key takeaway:
EMs are no longer just a high-beta growth allocation—they are increasingly a source of improving efficiency and shareholder returns.
How are companies in EMs changing?
Corporate governance and capital discipline are improving meaningfully across key emerging markets.
Several structural shifts are underway:
- Governments are encouraging higher RoE targets
- Dividend payouts are increasing
- Share buybacks are becoming more common
- Capital efficiency is being actively managed
Examples include:
- China’s efforts to reduce destructive competition and improve margins
- South Korea’s “Value-Up” initiatives focused on shareholder returns
- Large-cap firms increasing buybacks to enhance equity efficiency
These changes are contributing to:
- Upward revisions in earnings expectations
- Improved investor confidence
- Potential valuation re-rating
What are the risks and constraints?
Despite structural improvements, emerging markets remain exposed to cyclical and geopolitical risks.
Key considerations include:
- Geopolitical tensions (especially involving China and global trade)
- Currency volatility
- Policy missteps or uneven reform implementation
- Concentration risk in large technology names
Additionally:
- EMs can still be more volatile than developed markets
- Political and regulatory risks remain elevated in certain regions
What investors should know:
The opportunity is broader than headline indices—active allocation may be necessary to avoid concentration and capture underlying improvements.
What are the portfolio implications?
Emerging markets may warrant a reassessment within strategic asset allocation frameworks due to improving fundamentals and valuation support.
For equities:
- Rising RoE + falling cost of equity → potential valuation uplift
- Earnings growth expectations are accelerating
- Momentum has already begun to favor EMs relative to developed markets
For fixed income:
- Disinflation supports:
- Local currency bonds
- Duration exposure
- Spread compression
For multi-asset portfolios:
- EMs offer:
- Diversification from developed market cycles
- Exposure to structural global themes (AI, supply chains, currency shifts)
- Attractive relative valuations
Read the full report
The full white paper provides detailed data, regional analysis, and supporting charts on the structural transformation underway in emerging markets.
Download the full white paper to explore the macro drivers, valuation dynamics, and asset allocation implications in greater depth.
Make emerging markets a continuous conversation
Markets don’t stand still—and neither does our thinking. Join a growing community of investors who receive our latest emerging markets research, data-driven insights, and evolving views as global conditions change.