What exactly are emerging markets, and are they worth investing in?

Investing in emerging markets can be a fantastic way to diversify your holdings

Is this a good time to support them?

The majority of seasoned investors will be aware of the prospects in emerging markets.

However, particularly for novice investors, the phrase can be ambiguous.

Although the term "emerging market" has no universally accepted definition, it typically refers to economies that are moving from being relatively undeveloped to fully developed post-industrial economies with high living standards.

Investing in them allows you to tap into important themes like artificial intelligence (AI) while diversifying away from developed areas like the US or the UK, where your portfolio may naturally have a lot of exposure.

They are also talented performers; watch the entire video here. The Association of Investment Companies (AIC), an industry association that represents UK investment trusts, analyzed Morningstar data and found that the average investment trust in the emerging markets sector returned 65% over the 12-month period ending on May 22, while the average investment trust returned 24%.

According to Omar Negyal, manager of JPMorgan Emerging Markets Dividend Income Trust, "emerging markets have benefited from a weaker US dollar and strong earnings growth, as well as investors looking to diversify away from concentrated US markets."

Over the past five years, the average emerging market investment trust has returned 60%, and over the past ten years, it has returned 257%. Although MSCI World, which tracks developed market companies, has outperformed its emerging market counterpart over the last five and ten years, the MSCI Emerging Markets Index returned 47 percent in the 12 months ending April 30, 2026, compared to 29 percent for MSCI World.

We examine in more detail which nations make up emerging markets and how to invest in them.

Which nations are markets that are developing?

The International Monetary Fund's emerging market and middle-income classification, which covers 40 countries, is likely the closest thing to a universal definition of an emerging market. The BRICS countriesBrazil, Russia, India, China, and South Africahave some of the biggest and most influential economies on this list.

However, MSCI, which separates national economies into five categoriesdeveloped, emerging, frontier, advanced frontier, and standalone marketsis a more pertinent classification for investors. The following economies are considered emerging market economies by the MSCI.

What features distinguish emerging markets?

The economic trajectory of emerging markets tends to lead to some general themes that are of interest to investors, even though each emerging market is unique (just as every country is unique).

The comparatively quick rates of economic growth are one of these. These nations typically have high growth rates in terms of year-over-year percentages because they are raising their standard of living, frequently from a relatively low starting point.

That frequently goes hand in hand with enhancing the financial infrastructure. For instance, thanks in large part to investments in the unified payments interface (UPI) technology that supports the nation's payments network, India has transformed from a primarily cash-based economy to the largest digital payments market in the world in less than ten years.

In comparison to developed economies, emerging markets typically have younger populations and rapidly rising educational standards.

Additionally, you can be exposed to significant structural trends in some emerging markets without increasing your exposure to developed markets.

"The AI boom has boosted both Taiwanese and South Korean markets because of increased demand for semiconductors and memory chips," Negyal stated. In a similar vein, he continued, "stronger commodity prices and increased demand for energy and resources have supported companies throughout Latin America."

What dangers come with making investments in developing markets?

Compared to developed markets, many of the benefits of investing in emerging markets also entail higher risk.

Geopolitical factors, like the trade tensions between the US and China in recent years, can have an impact on them, and exchange rate fluctuations can be problematic for emerging economies.

Emerging markets were negatively impacted by the Iranian conflict, but this could be changed by the US-Iran peace agreement.

According to Jacqueline Broers, co-fund manager of the Utilico Emerging Markets Trust, "the US is likely to face elevated inflation, potentially causing the US Federal Reserve to raise interest rates." As a result, the US dollar may appreciate, emerging market currencies may decline, and the macroeconomic standing of numerous emerging economies may be compromised."

Additionally, compared to developed markets, some emerging markets have laxer corporate governance regulations, which raises investor risks.

Similarly, if the structural trends that are currently helping emerging markets turn around, it could be detrimental.

"Tech-heavy markets like Taiwan and Korea may underperform if there is a significant reversal in the AI theme," stated Hiren Dasani, chief investment officer at Ashoka WhiteOak Emerging Markets Trust.

Do emerging markets make sense for investments?

Is this a good time to invest in emerging markets, taking into account all of these factors?

The emerging market in question will determine this. As previously mentioned, each is unique and presents unique opportunities and risks.

According to Broers, "lower valuations relative to developed markets have also benefited emerging market equities." Value investors will be drawn to the opportunities in emerging markets as long as this valuation discount is present.

In the end, you should determine whether or not to invest in emerging markets based on your situation and the composition of your portfolio, but if you are currently unexposed, they might provide some diversification.

How to make investments in developing economies.

There are various approaches you can take if you're thinking about investing in emerging markets.

A cheap index fund that tracks an index passively is an option. As an illustration...

Vanguard FTSE Emerging Markets ETF (LON:0LMP), which tracks the FTSE Emerging Markets All Cap China A Inclusion Index, and iShares MSCI Emerging Markets ETF (LON:0JHF), which tracks the MSCI Emerging Markets Index. Investors who prefer a more active strategy might choose an emerging markets-focused investment trust, such as Ashoka WhiteOak Emerging Markets Trust (LON:AWEM) or Templeton Emerging Markets Investment Trust (LON:TEM), which both make long-term investments in emerging market economies.

An alternative option is Fidelity Emerging Markets Limited (LON:FEML), which can invest up to 30% of its portfolio in short positions. This is usually the case when a company operates in a sector that is going through a structural decline and there is a governance issue.

Emerging market investment trusts that concentrate on dividend stocks in emerging markets are JPMorgan Emerging Markets Dividend Income Trust (LON:JEMI) and Utilico Emerging Markets Trust (LON:UEM). UEM is a next-generation dividend hero, having increased its dividend payout for ten years running.

See More MSCI.