Some of the most interesting investment themes are available in emerging markets; here's how to get noticed
Although the emerging-market bull isn't quite back yet, investors are giving it serious thought. As a whole, emerging markets (EMs) have had a depressing 15 years, despite notable success stories like India. This is because rising US stocks have left fund managers with little incentive to look elsewhere. According to Jeff Sommer in The New York Times, US stocks returned an average of 14 percent in dollar terms between 2009 and 2024, nearly twice as much as emerging stocks did during the same time period (7 percent).
However, the situation has been reversed by Donald Trump's tariff chaos. In the first half of 2025, EMs posted a strong 14 percent return, while American shares saw a 5 percent return. This spring, a brief but terrifying collapse in the US bond market is prompting a reevaluation of which nations are truly banana republics. EMs typically make the argument that, despite their higher risk, they offer significant growth potential. However, according to MSCI calculations, US public markets were actually more volatile than the average emerging market in terms of foreign currencies during the first half of 2025. This is not surprising to anyone who looked at their share portfolio during the intense market crash in April.
Emerging markets become more reputable.
Trump's America isn't the only developed country being questioned. According to Devan Kaloo, global head of equities at Aberdeen Investments, "many EM central banks were quicker to raise rates than their developed-market counterparts" after the pandemic. In contrast, a number of developed market central banks have experienced a decline in credibility, in part because of their inability to act quickly enough and their increasingly stressed national balance sheets. As a result, "relative credibility" has changed, with EMs experiencing slight gains "versus continued erosion" in certain developed markets.
As Chinese growth fueled global commodity markets in the 2000s, the last EM bull market occurred. The MSCI EM index increased by almost 200 percent between 2001 and the end of 2009, while the developed world saw a dismal 4 percent increase (due to the .com and subprime crashes). It might not be possible to have a simple rerun of that heyday, where most EM boats were lifted by a rising Chinese tide. There will undoubtedly be differences in performance during the next bull run because the EM grouping has become so diverse. Middle Eastern energy plays, Latin American copper miners, and East Asian tech leaders are unlikely to experience a boom at the same time.
If there is one thing that unites EMs today, it is the financial reasoning that positions them as an alternative to the US capital markets. EM funds are one of the most obvious places for redirected flows when uncertainty arises on Wall Street, much like a neighborhood bar may see an increase in business when a patron's marriage begins to falter.
According to historical data, EM assets will increase when the dollar declines. It appears that this correlation was caused by straightforward financial reasoning: EM sovereigns and businesses would have lower financing costs if the dollar declined in value. As a result, the outlook for earnings and growth improved automatically. However, instead of taking on the currency risk associated with US dollars, businesses in the developing world are increasingly able to borrow in their own currencies.
Instead of breaking down as you might have expected, the inverse dollar-to-EM correlation hasn't, indicating that global capital flows play a larger role than balance-sheet effects. Thus, purchasing EMs could be a shady method of shorting an overpriced dollar.
Developing market expansion.
For the time being, the current EM rebound may be more a sign of international fund managers reducing their exposure to the US than it is of a sudden surge in interest in Polish energy plays or South African miners. America alone cannot sustain a new EM bull market over the long run.
Although they are still prevalent, the traditional growth themesa growing middle class, demographics, and rapid economic growthare no longer universally applicable. Most of Latin America is stuck in the middle-income trap, while East Asian populations are aging. Actively managed funds are a strong choice because of the necessity to select winners and steer clear of duds.
Kaloo draws attention to "three key structural developments: the global shift toward electrification, rising domestic consumption, and technology as a platform." He suggests using Tencent, the company that runs the Chinese "super app" WeChat, to play the first two. The strengths of multinational tech behemoths like Sony, Meta, and Spotify are combined by Tencent. However, despite its strong exposure to some of the fastest-growing consumer markets in the world, it trades at a much lower valuation. Kazakhstan's Kazatomprom, the world's largest uranium producer, is his preferred option for electrification because "the pace of demand for energy is growing rapidly around the world."
The fact that value created in emerging economies isn't always reflected on local exchanges is another argument in favor of funds. According to Fadrique Balmaseda, investment adviser for the Ashoka WhiteOak Emerging Markets Trust (LSE: AWEM), as of June of this year, 11.6 percent of the portfolio was made up of shares in developed markets. The shares of LVMH and Herms, for instance, are listed in Paris, but "approximately a third of revenues" originate from Chinese luxury buyers.
The Fidelity Emerging Markets Limited Trust (LSE: FEML), which has increased 21 percent this year and has an ongoing charge of 0 percent, and the Templeton Emerging Markets Investment Trust (LSE: TEM), which has increased 21 percent and has an ongoing charge of 1 point, are two options for securing broad exposure. Both are currently heavily invested in Asian tech plays, like Taiwan-based chipmaker TSMC, which is indicative of the underlying EM index.
In conclusion, some of the most fascinating growth stories in the developing world are occurring in the even more peripheral "frontier" category rather than emerging markets. The BlackRock Frontiers Investment Trust (LSE: BRFI) provides exposure, with a significant bias toward Turkey and the Gulf states.
Vietnam: a cheap and roaring Asian tiger.
The Southeast Asian tiger's export-led manufacturing strategy has caused its GDP per capita to more than fivefold since the mid-2000s. However, Donald Trump's reelection seriously questioned the country's growth strategies. Out of all the nations, Vietnam has the third-largest trade surplus with the US. Local stocks had their worst day in two decades in response to Trump's April threat of 46% tariffs. In the event of a severe recession, economists predicted that GDP would shrink by up to 4%.
Hanoi managed to negotiate a far better deal last month, fortunately. Though it isn't high enough to displace local factories, the new 20% tariff (with the possibility of a 40% one on Chinese "trans-shipments") is hardly welcome. More importantly, there is no reason to believe that Vietnam's position as the region's emerging manufacturing hub is in jeopardy given that its neighbors are being slapped at comparable rates. Since the US deal was announced on July 2, the local VN-index has increased by 17%, and it has gained 33% in just one year. Concern has shifted to whether local gamblers' "intense" buying spree is sustainable, according to Nguyen Kieu Giang on Bloomberg. Since the market is still regarded as "frontier" by index providers FTSE Russell and MSCI, the fact that retail traders make up over 80% of the local market value partially reflects the lack of significant institutional funds. Vietnam is still relatively inexpensive when compared to the majority of its regional peers, with forward earnings at 11:1 times.
Additionally, the holy grail may be approaching. According to a recent Dragon Capital report, "there are clear signals that an upgrade in FTSE Russells index hierarchy could be announced in September 2025, with official inclusion as early as March 2026." This could release several billion dollars from active funds and hundreds of millions of dollars in passive inflows from investors who follow the EM index. Additionally, it might open the door for an even more revolutionary update to the MSCI EM index. Growth dynamics don't appear to be slowing down. Thuy Anh Nguyen, director of Dragon Capital, states that the government revised its growth target from 8% to 8.5 percent because "FDI, public investment, and corporate earnings growth have all surprised on the upside." Through Mobile World Group (MWG), an electronics retailer, Dragon Capitals Vietnam Enterprise Investments Limited (LSE: VEIL) fund is reaching out to the nation's growing middle class. Bach Hoa Xanh, a grocery subsidiary, is helping MWG capitalize on "the shift in consumer behavior away from wet markets to convenient modern stores."
This year, VEIL has been London's best-performing trust with a focus on Vietnam. In just five years, Dynam Capitals Vietnam Holding (LSE: VNH), which leans more toward smaller stocks, has produced an outstanding 169 percent return. One of the wider types of assets that VinaCapitals Vietnam Opportunity Fund (LSE: VOF) invests in is private equity.
India relaxes.
India is still mired in the trade war's haze, while Vietnam benefits from tariff clarity. The White House has imposed eye-watering 50% tariffs on the most populous country in the world. Half of the tariffs are a penalty for purchasing Russian oil, and the other half are retaliation for New Delhi's £45 billion goods surplus with Washington. A contrarian may see a chance to buy. Trump usually does more harm than good when it comes to tariffs. Once the sabre-rattling is finished, a deal of some kind appears likely to be reached. Tariffs are a major annoyance and make it more difficult for India to become Asia's next major electronics manufacturing nation. But because of the size of the domestic economy, US exports only account for around 2% of GDP. Trade disputes with Washington are just not as important to New Delhi's economy as they are to Hanoi.
The actual issue is that the Indian stock market is losing momentum. Indian stocks trade at a significant premium to the EM average of 13 on a forward price/earnings (p/e) ratio of 22. In general, Indian blue chips are deserving of these high ratings. Due to the challenging business environment in India, companies that succeed are typically well-run.
Furthermore, GDP is growing at a rate of 6.5 percent annually. However, when earnings fall short of expectations, as has recently happened, high valuations are at risk. According to Reuters, Bharath Rajeswaran and Vivek Kumar M observe that earnings growth has been in the single digits for five straight quarters, falling short of the 1525% pace that sparked the current bull market in 2020. It is suspected that the only thing keeping things afloat is determined local retail purchasing.
The local BSE Sensex has lagged behind its regional competitors, rising just 2.5 percent this year. Strangely, Indian shares now resemble those in the United States: a market with strong long-term prospects, top-notch companies, and overly eager retail buyers that is losing steam in the face of negative news and high valuations. Furthermore, even if the short-term setup is not particularly encouraging, long-term investors cannot afford to wait, much like in America.
The majority of London-listed India trusts are currently in the red for the year as a result of the pound's 11% rally against the rupee this year. Though it has underperformed during India's equity boom, Abrdn New India Investment Trust (LSE: ANII) should offer some protection during soft times thanks to its cautious emphasis on large-cap, premium shares. With a 171 percent gain over the previous five years, the small and mid-cap India Capital Growth Fund (LSE: IGC) has been a standout performer. The team has a track record of success, with an average annual return of 153 percent since 2005. India's more than 5,000 listed companies are a rigorous test of stockpicking skills.
Leave a comment on: At a discount, emerging market stocks offer robust growth