While the US continues to dominate the news headlines, it appears to be losing a more consequential battle – one for technological leadership and the minds of global investors – as emerging markets rise as a serious contender.
Last year saw the most remarkable and coordinated outperformance of emerging markets versus the developed world in the past 15 years. The strong performance we are seeing today, however, is very different from the commodity-fuelled rally of the past.
Driven by a powerful combination of structural improvements, cyclical tailwinds and thematic catalysts across a range of countries from Brazil to South Korea, it points to a profound paradigm shift. The relative weakness of the Western markets has further reinforced this momentum.
Structural ‘deep-clean’
Emerging markets have clearly benefitted from several major structural improvements that have strengthened their resilience and made them a more attractive investment destination. Many EM economies have tightened their economic fundamentals, with better inflation control, healthier current account positions and more robust earnings growth – challenging the assumption they should always carry a higher risk premium.
At the same time, substantial governance reforms – especially in places such as Korea, with its ‘Value Up’ programme, which is aimed at improving governance and boosting transparency and accountability – are helping companies improve returns, margins and shareholder payouts.
For 15 years, emerging markets flooded the market with new shares – diluting earnings per share (EPS) – but we are now seeing a reversal of this trend, with share buybacks combined with reforms boosting profitability and fuelling the current EM rally. This focus on efficiency and shareholder returns brings them in line with their developed-market peers and is something savvy investors are taking notice of.
Cyclical tailwinds
In addition to meaningful structural changes, emerging markets have been buoyed by a powerful set of cyclical tailwinds that are reinforcing their recent outperformance. A weaker US dollar is easing financial conditions and boosting EM currencies, for example, while commodity prices are rising again – this time tied to the AI driven infrastructure investment boom – supporting exporters across Latin America and Asia.
Furthermore, inflation has already fallen in many developing economies – allowing central banks to cut interest rates ahead of developed markets and stimulate growth; earnings momentum has strengthened as emerging economies recovered earlier and faster; and trade flows have improved, helped by resilient Chinese demand and expanding ‘EM to EM’ supply chains.
As markets such as Brazil, Korea, Mexico, South Africa and Taiwan rally in unison and global investors turn towards cheaper, higher growth regions, these cyclical forces are aligning to support the early stage of what promises to be a durable EM cycle.
Sentiment U-turn
The recent tech stock sell-off in the developed world served as a stark reminder of the importance of investor sentiment – and it can go both ways. In just over a year, we have seen a major U-turn in China’s perception – only 18 or so months ago it was deemed uninvestable, with global investors’ exposure ranging from low to non-existent. Much of the rest of the emerging markets was also treated with caution.
Fast forward to January 2026, and inflows into EM reached a record high, following a very strong final quarter of 2025 – reflecting not just the shift in sentiment but also the increasing acknowledgement of EM’s discount to the US market of some 40%.
This strikes us as an anomaly given emerging economies contribute some 40% of global GDP and about 70% of incremental global growth. In addition, emerging markets demonstrate the highest EPS growth, which we expect to translate into favourable market valuations over the longer term.
From basic to high-tech
Emerging markets’ technological prowess is also becoming increasingly obvious. While the popular narrative still places innovation and value creation with the US, the reality is quite different. The production of high-end semiconductors, which is so crucial to the very existence of AI, predominantly takes place in Taiwan and South Korea – just one example of emerging markets’ high-tech primacy.
Over the past decade, emerging markets, particularly in Asia, have quietly reinvented themselves as the global AI hardware powerhouse, manufacturing essential components – from chips to sensors – that make the AI boom possible.
“Emerging economies’ innovation capacity, corporate profitability and shareholder returns are improving – as is investor sentiment – but the risks associated with the developing world have not disappeared.
The breadth of areas in which certain emerging market economies have gained a strong competitive edge cannot be reduced to a single sector”
While AI has certainly helped bring emerging markets’ industrial capability to light, it is far from the only sector where they excel. From China’s leadership in solar-power generation and automobile exports, to Taiwan’s leadership in the production of advanced chemical and composite materials used in high-performance electronics, the breadth of areas in which certain emerging market economies have gained a strong competitive edge cannot be reduced to a single sector.
And, because of this sheer variety of high-class expertise, investing in emerging markets is no longer just a high beta play on global growth – it is a growing recognition this market is attractive, self-sufficient and highly competitive in its own right.
Selective exposure
While there are numerous reasons to be optimistic about emerging markets in 2026, it is a highly-nuanced asset class, influenced by a wide variety of domestic and international factors. Having an in-depth understanding of local dynamics and access to on-the ground intelligence is essential to successfully navigating it.
Emerging economies’ innovation capacity, corporate profitability and shareholder returns are improving – as is investor sentiment – but the risks associated with the developing world have not disappeared.
With that in mind, we strongly advocate for active management with targeted exposure to high-quality businesses over broad index positioning. Given emerging markets’ heterogenous and often mercurial nature, the latter approach simply will not cut it.
Naomi Wastell is an emerging market fund manager at Carmignac
