Invest in emerging markets with a focus on growth

According to Kaylie Pferten, developing nations present investors with attractive long-term economic prospects

The emergence of emerging markets (EMs) has returned. Over the first ten months of the year, the MSCI Emerging Markets index produced a 31 percent return, while the MSCI World index, which is focused on developed markets, only produced an 18 percent return. This kind of performance has been long overdue. Since 2020, investors in emerging-market stocks have never experienced greater returns than those from developed markets.

These stocks offer exposure to nations that are taking advantage of demographic advantages like younger populations and capitalizing on trends like urbanization and industrialization. They have the capacity to grow faster at an earlier stage of development. However, that story has taken a backseat in recent years.

Investors have avoided equity markets because they are thought to be riskier in the midst of worldwide political and economic upheaval. Many developing economies with substantial debt denominated in dollars have faced significant challenges due to the US dollar's strength as a safe-haven asset. Additionally, returns have been negatively impacted by the struggles of specific markets, such as China, where a debt crisis has created serious issues.

It looks like those headwinds are lessening. Due to the US cutting interest rates, the dollar has significantly declined this year. This has helped EMs directly, but it has also had an indirect effect, encouraging investors to choose riskier securities due to lower returns on safer assets like fixed-income instruments. "A weaker dollar typically boosts purchasing power, making imported goods cheaper, and it often lowers the cost of capital," says Robert Marshall-Lee, Cusana Capital's chief investment officer. Growth, investment, and profits are all boosted by this. A "

Investors have also been won over by appealing valuations. On average, the current components of the MSCI Emerging Markets benchmarks are priced at roughly 14 times their projected earnings for the upcoming year, whereas the average US stock is priced at 23 times. Thus, Goldman Sachs hopes that the EMs rally will continue. Its optimism is a reflection of both the robust earnings performance of numerous emerging market-based technology companies, which are reaping the benefits of the AI boom, and changing macro trends.

Emerging markets appear to have a promising future in 2026. Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equities Fund, states that "the fundamentals of emerging-market economies look sound." Businesses' balance sheets have been strengthened by their conservatism; this, along with favorable valuations, puts them in a strong position to produce better growth. The excessive returns that investors are frequently promised from EMs could be fueled by such advantages. According to research released earlier this year by Amundi, average yearly returns from emerging-market stocks were expected to be 7%, compared to 6.4% from Europe and 5.6% from the US.

Higher projections are included in the Amundi report for specific markets, most notably India, where an average annual return of 7.4 percent is anticipated over the next ten years. Marshall-Lee continues, "It offers high-quality, well governed franchises with extensive growth prospects."

Amundi anticipates a lower annual growth rate of 6.8% in China. Chinese stocks have performed better in 2025 thanks to major AI players like DeepSeek and Alibaba. However, there are worries about the aging population and its slower growth and productivity. An additional intriguing market could be Vietnam. A robust domestic economy, a surge of companies entering the stock market, and reforms aimed at strengthening the private sector are all garnering attention.

The impact of US trade tariffs on growth, however, is a major concern for many developing nations. However, each country has a different story about tariffs. In addition to the current 50% tariff, President Donald Trump has recently directed his attention toward India, threatening to impose an additional 25% penalty if the nation keeps purchasing oil from Russia. A trade agreement with China, on the other hand, is becoming more likely. Additionally, ties with other emerging markets are cordial.

Emerging markets: investment opportunities.

Alex Watts, a senior investment analyst at the investment platform Interactive Investor, advises keeping your eyes on the big picture. "Emerging markets are underrepresented in global indices versus their contribution to world GDP and populations," he notes. A well-diversified fund can give investors access to professional knowledge in important markets while assisting them in managing risk. "The Fidelity Index Emerging Markets fund is a passive option with a charge of just 0.2 percent a year for a very broad and low-cost approach," says Watt. The Templeton Emerging Markets Investment Trust (LSE: TEM) and the JPM Emerging Markets Fund are two highly regarded active funds that provide a wide exposure.