2025 was the year when Emerging Markets (EM) stirred from their long slumber and began to deliver on the potential of their economic and industrial prowess. The MSCI EM Index has risen by almost 30%, which compares favourably with the 20% gain of the MSCI All Country World Index.
The question is whether this marks a one-year wonder or an inflection point in EM fortunes.
At the macro level, as U.S. interest rates decline and the U.S. dollar weakens, emerging market central banks can adopt a looser monetary policy without jeopardising their currencies, provided inflation is under control. Almost all emerging market countries are large importers of oil, and while the oil price remains subdued, the opportunity to adopt more accommodative monetary policy is considerable. This points to a significant investor shift towards emerging markets, primarily driven by opportunities at various stages of consumption for over half the world’s population, ranging from eCommerce businesses offering quick delivery to busier households, through to service and product offerings that improve lifestyles.
While the returns this year have been excellent, they have also been sector specific. The global enthusiasm for AI, alongside investment in computing and technology across the supply chain, has supported returns in Korea and Taiwan. Both countries are dominated by the technology sector, with IT index weights of 50% and 80%, respectively. Taiwan Semiconductor remains by far the largest company in the MSCI EM Index, returning over 35% this year, while Samsung Electronics and SK Hynix in Korea have delivered over 100% and 200% returns, respectively. All three companies were held by the portfolio and contributed handsomely.
In February, Chinese technology company DeepSeek revealed an alternative to U.S. AI dominance at a markedly lower cost. This encouraged a reassessment of China’s technology industries and challenged the view that they lagged their international peers. President Xi’s meeting with many of the Chinese technology titans in February, and especially Alibaba’s Jack Ma, signalled government approval and support for the industry.
Our interest in technology remains company specific. Looking ahead to 2026, we expect the outlook to remain encouraging, but our focus is on companies monetising goods and services beneath the AI headlines. Tencent is the largest listed company in China, and its AI development has improved the advertising and targeting of consumer services across its one billion daily WeChat app customer base, supporting revenue and margin growth.
Conversely, the property sector in China remains moribund and has weighed heavily on consumer sentiment, reflected in modest retail sales growth. There is little evidence of a recovery in consumption at present, although travel within Asia and domestically is improving and supports selective investment opportunities amongst hotel groups and leading travel agents. Other areas of the portfolio’s exposure to China will be weighted towards cash rich, asset light businesses, many in the eCommerce sector offering affordable or necessary products.
The Korean Corporate ‘Value Up’ programme gained momentum this year as the newly elected Democratic Party government reiterated the policy’s ambitions. The aim is to encourage companies to improve corporate governance and increase shareholder returns.
Our discussions with management teams indicate a greater willingness to address suitable profit metrics, performance targets and the valuation discount. The complex structures of larger companies such as Samsung could be simplified, enabling clearer capital allocation and meriting higher valuations.
India has been a dilemma for investors this year. Inflation remains subdued, interest rates have fallen, and the economy continues to benefit from the Modi government’s reforms. But these advantages have been overshadowed by the enthusiasm for technology and ‘cheaper’ markets elsewhere. India has traded at a premium for the past decade, supported by Modi’s programmes of reform and justified by corporate returns and stellar economic growth. GDP expanded by over 8% in the second quarter, again beating expectations, and inflation is near historic lows.
There is scope for the Reserve Bank of India to cut interest rates, and the Goods and Services Tax (GST) reforms in September reduced the tax rate across a range of consumer goods categories. This will reduce costs to the consumer and support domestic business, particularly in the small and medium-sized segment. Bajaj Finance, India’s largest consumer finance company, is expected to benefit from increased consumer demand, increasingly supported and assessed through AI adoption. Almost half of loan applications are now screened by the company’s AI-developed models, and all of its marketing video campaigns are AI-generated.
India has been a very lucrative market for our portfolio since Prime Minister Modi was first elected in 2014. The scale of opportunity remains compelling, and the country is the most exciting long-term investment opportunity in our universe. The scope is wide ranging and reaches across healthcare, financial services, vehicle ownership and the rapid adoption of eCommerce.
Latin America continues to offer company specific opportunities which address the needs and aspirations of over 600 million people. There has been a definite shift in the politics of the region following the election of President Milei of Argentina in 2023. Chile has recently elected the centre-right candidate José Antonio Kast, and Brazil will hold elections next October. If the centre-right parties can select a credible candidate, the country may see a change of government, a more disciplined fiscal programme and a renewed focus on job creation. In addition, while the central bank has exercised strict control to keep inflation below 5%, interest rates remain elevated at 15% and clearly have scope to decline. Financial inclusion has grown significantly in recent years with the development of fintech businesses such as Nubank. Lower borrowing costs would support local business, and rising incomes would support spending across industries such as eCommerce and retail.
Emerging Markets can deliver again in 2026. Political leadership, economic growth and rising incomes should encourage both consumer spending and business investment. As for Consumer optimism? Next summer’s expanded World Cup, with broad participation from emerging and frontier nations, will be a timely indication of the scale and dynamism of EM consumer markets!
Read our latest insight: “Emerging Markets Outlook 2026” – click here to view the full PDF.
