Under the Radar: Why Now is the Time for Emerging Markets

• Emerging market equities remain attractively valued and provide significant diversification benefits to investment portfolios.
• The current dollar environment is advantageous for emerging market equities, both enhancing country-specific fundamentals and encouraging capital inflows to the asset class.
• Structural growth factors such as advancements in technology and demographic trends continue to support long-term growth prospects in emerging markets.

Emerging market equities have delivered strong results thus far in 2025, providing investors with year-to-date returns exceeding 30%. Despite this impressive performance, we believe the market recovery is still at an early stage, and that emerging markets (EM) continue to present significant upside, especially given their appealing valuations relative to developed markets. This valuation gap creates an opportunity for investors to tap into emerging market growth at favorable prices.

Exhibit 1: China — Valuation Opportunity Remains Compelling

EM equities tend to benefit from a stable or depreciating U.S. dollar, making current conditions favorable for the asset class. This is a function of lower U.S.-denominated debt servicing costs, commodity exporter tailwinds and increased monetary policy flexibility facilitating falling rates and supporting economic growth. Additionally, this environment comes hand in hand with improved investor sentiment, fostering a virtuous cycle as increased foreign capital flows into the regions further enhance potential investment performance.

Exhibit 2: Sluggish Dollar Bodes Well for Emerging Markets Equities

Investing in emerging markets offers exposure to many countries offering economic growth rates faster than most developed nations. Additionally, EM provides exposure to long-term structural trends:

• China Recovery:The C hinese economy is in the early stages of a policy pivot from a focus on deleveraging toward one that targets growth. This creates company-level investment opportunities and encourages more global investor flows to return to China.
• AI Demand: The launch of China’s DeepSeek chatbot sent shockwaves around the world, highlighting Chinese advancement and shifting assumptions about the cost and scale needed for cutting-edge AI. In addition to China, several other EM countries are key developers of components critical for AI development, offering significant investment opportunities.
• India Growth: India offers great upside potential as it remains the fastest-growing major global economy, benefiting from a large and young population. Indian valuations have seen a correction back to long-term levels, reinforcing the importance of active management to gain exposure to company-level opportunities.

More broadly, EM equities provide exposure to companies benefiting from accelerated technological adoption, demographic shifts such as urbanization and the expansion of the middle class and financial inclusion. These businesses have world-class innovation capabilities across an array of sectors, all of which benefit from substantial investment in research and development and intellectual property creation. We believe these fundamental trends establish a robust foundation for ongoing economic development and corporate earnings growth in emerging markets.

In addition to offering potential return upside, EM allocations offer diversification benefits that can reduce overall portfolio risk. EM stocks often have different economic cycles and sector exposures compared to developed markets, providing investors the potential for less correlated returns and better risk-adjusted performance.

Exhibit 3: Correlations Among Global Markets

Such diversification can be particularly useful in periods when other asset classes struggle. For example, emerging markets have tended to outperform the U.S. market during periods of low U.S. returns. Specifically, in the rolling 10-year periods since 1971 when the S&P 500 Index has returned less than 6% annualized, the MSCI Emerging Markets Index has outperformed U.S. equities every time while delivering an annualized return of 12.1%¹.