Why do analysts believe emerging markets will perform better?

One of the best-performing themes in 2025 was emerging markets, but as international investors diversify, they may continue to grow

2025 was one of the best years for emerging market stocks in recent memory.

The MSCI World Index, which includes global stocks from developed markets, returned 21.1 percent during the year, while the MSCI Emerging Markets Index, which is an index of large- and mid-cap stocks from emerging markets, returned 33.6 percent, its highest annual return since 2017.

Experts believe that many of the factors that contributed to last year's success are still present, so the emerging market rally may not be finished either.

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Start your trial A weak dollar, a potentially more dovish Federal Reserve, and investors' desire to diversify away from the US are some of the main factors favoring emerging markets.

Mali Chivakul is an economist for emerging markets at J. With the exception of outflows from China, Safra Sarasin Sustainable Asset Management predicts that "2026 will be a year of net inflows into emerging market asset classes" and notes that the year began strongly.

In the first two months of 2026, the MSCI Emerging Markets Index increased by 14.9%, but after the start of hostilities in the Middle East, it slightly decreased.

Even though they have outperformed their international counterparts over the past year, emerging market stocks are still highly valued and could profit from several different tailwinds this year.

"A lot of people are underweight emerging markets, if they are there at all," Marcus Weyerer, Franklin Templeton's director of ETF investment strategy, EMEA, told BFIA.

What makes emerging markets worthwhile to consider if you have no exposure to them and are thinking about where to put your money?

An emerging market is what?

For novice investors in particular, the term "emerging market" may be ambiguous. Although there are different economic definitions, the MSCI classification system is typically used when talking about emerging markets in an investing context.

This classifies economies according to the size and accessibility of their capital market, as well as the degree of economic development. Because of the way their stock markets are regulated, a number of highly developed economieslike China or South Koreaare classified as emerging markets, which makes the second two factors crucial.

This is primarily because of the way Korea's capital markets are governed, such as the prohibitions on short-selling and full currency conversion from the South Korean won.

According to Weyerer, "these restrictions have almost zero implications for a retail investor."

In the end, though, Korean stocks are categorized as emerging market stocks, which contributes to their relative undervaluation.

Emerging markets could benefit from the weakening dollar.

In the first two months of 2026, the US dollar index, which gauges the strength of the currency relative to a basket of international rivals, decreased by about 0.4 percent, and it has decreased by more than 8 percent in the previous year.

"A weaker dollar is historically beneficial for emerging markets," says Weyerer. The main reason for this is that emerging markets have about £4 trillion in debt denominated in dollars, which becomes less expensive to service in their native currencies when the dollar depreciates.

The Federal Reserve (Fed) is lowering interest rates, which makes borrowing dollar assets even less expensive.

However, if the conflict in the Middle East continues, this dynamic might be reversed. The Fed may decide to slow down its rate-cutting pace as a result, strengthening the dollar.

However, the macroeconomic environment is still favorable for emerging markets moving forward. Chris Tennant, portfolio manager at Fidelity Emerging Markets (LON:FEML), stated, "Although US dollar weakness remains a tailwind for the asset class, it is not the only driver for emerging market outperformance." "EM outperformance is not dependent on ongoing USD weakness because many emerging market economies benefit from more advanced capital markets and carry less debt denominated in dollars than in the past. The "

US diversification and low prices for emerging markets.

Compared to many of their international counterparts, emerging market stocks are more appealing on a micro level.

In comparison to global stocks, US stocks have had a slower start to the year.

"People are looking to diversify out from expensive US tech," Weyerer said.

Although US stocks make up more than 70% of the index, MSCI World, which is frequently referred to as the authoritative global stock market index, has no exposure to emerging markets.

"People have realized in the past year that there may be more out there than just the US," Weyerer stated.

AI exposure is still available through emerging market stocks.

With the Magnificent Seven megacaps making up more than 30% of the index, the SandP 500 is significantly biased towards AI stocks.

However, exposure to AI can still be obtained by investing in some emerging markets, usually at more favorable valuations.

With Samsung Electronics (Seoul:005930) and SK Hynix (Seoul:000660) accounting for roughly 53% of the MCI Korea Index as of February 27, the Korean market in particular is heavily dominated by AI.

Samsung's stock is trading at less than ten times its projected earnings, despite having quadrupled in value in the 12 months ending February 27 (compared to about 23 for Nvidia). Despite more than quintupling during that time, SK Hynix is currently trading at less than six times its anticipated earnings.

Then there is Taiwan Semiconductor Manufacturing (NYSE:TSM) (TSMC), the biggest stock in the MSCI Emerging Markets Index and a major supplier to nearly all US AI companies as well as Nvidia and Advanced Micro Devices (AMD). TSMC's forward P/E multiple is now higher than Nvidia's at over 26, which highlights how dependent the larger AI ecosystem is on developing market regions, but it's safe to say that the company is no longer a hidden gem.

"You're diversifying your AI trade out of the hyperscalers, to the companies that actually produce the chips those hyperscalers need for the data centers," according to Weyerer, by making investments in developing markets.

Diversification of industries using stocks in emerging markets.

One benefit of investing in emerging markets is the sectoral diversification they offer. Although AI is mentioned, it isn't as prominent as it is in developed markets, which essentially means the US.

The economies found in emerging markets are varied. The stock market in India, the largest country in the world by population and one of the fastest-growing economies, is much more focused on domestic issues than that of Korea and Taiwan, which are heavily reliant on technology.

"Maybe in five years, the economy will look quite different if you look at the recent trade deals that India has clinched," Weyerer remarked. "In India, consumption presents a significant opportunity. There are fantastic demographics. A "

Additionally, exposure to commodities like copper, silver, and gold is available in many emerging markets.

"The increasingly goldilocks type backdrop for commodity prices, with what could be continued strength in key mined commodities, is another key driver for the emerging market asset class," stated Tennant.

"Resource-rich EMs have benefited from commodity price rises," Chivakul stated. "Markets like Chile, Peru, and South Africa have benefited from high prices of gold, silver, and copper. A "

How to make investments in developing nations.

If your broker permits it, you could add stocks like TSMC, Samsung, or SK Hynix straight into your portfolio. You can find more ideas for individual stock selections in this article about three emerging market stocks, but if you want more access, you might want to use a fund or investment trust.

One easy way to get exposure is to invest in a low-cost index fund that tracks an emerging markets index, like the Franklin Templeton FTSE Emerging Markets UCITS ETF (LON:EMER) or the Xtrackers MSCI Emerging Markets UCITS ETF (LON:XMMS).

Investment trusts like Fidelity Emerging Markets, Templeton Emerging Markets (LON:TEM), or JPMorgan Emerging Markets Growth and Income (LON:JMGI) or active funds like Guinness Emerging Markets Equity Income Fund or the Invesco Emerging Markets ex-China Fund are examples of actively managed emerging market strategies.