- Persistent underweighting in global portfolios
- Attractive valuations
- Diversification benefits
- Frequent catalysts for change
Over the past decade, many emerging economies have implemented more disciplined fiscal policies, reduced inflation, and developed deeper domestic capital markets. Yet despite this progress, investors are still anchored to outdated perceptions of volatility and policy risk. For many institutional investors, allocations to emerging markets have shrunk dramatically over the past decade, leaving portfolios underweight by as much as 7%–8%. As developed markets confront slower growth and expensive valuations, that imbalance may eventually correct. Even a modest rebalancing toward neutral weights could improve portfolio diversification and growth exposure, especially as emerging economies continue to expand.
Attractive valuations may present a compelling entry point. Despite delivering robust earnings growth of over 20% in the past year, emerging markets equities trade at significantly lower P/E multiples than the S&P 500. For investors wary of stretched valuations in developed markets, emerging markets have historically demonstrated higher growth at lower valuations, representing a potential opportunity in today’s global landscape.
Diversification remains another underappreciated advantage. While risks such as tariffs and geopolitics persist, many emerging markets have shown resilience. Vietnam and the Philippines, for example, are often perceived as trade-reliant, yet their growth is largely driven by domestic consumption. Chinese exporters have adapted swiftly, rerouting supply chains and maintaining export volumes despite shifting global dynamics. The takeaway is that short-term volatility may spike, but the long-term trajectory remains intact. Currency markets also offer another tailwind: historically, emerging-market assets have outperformed during periods of US-dollar weakness. With economists forecasting a multi-year soft-dollar cycle, emerging markets could benefit from these historical relationships.
See also: Asian EM bonds set for 2026 revival on carry, investors say
Emerging markets are also characterised by frequent catalysts for change. These economies evolve rapidly, driven by shifts in policy, demographics, and technology. Such transitions have the potential to reshape entire industries and open new investment avenues, creating a dynamic environment where developments may lead to revaluations and fresh growth prospects. The pace and breadth of transformation in emerging markets set them apart from more mature economies.
To capitalise on this dynamism, a thoughtful approach to investing in emerging markets often means taking a contrarian stance — one that targets the “forgotten middle.” Instead of concentrating on large, widely followed companies, this approach seeks out average-sized firms that mainstream investors tend to overlook, yet which have clear, company-specific catalysts for change. These businesses can offer distinctive opportunities for growth and revaluation, and their relative independence from broad market sentiment may help portfolios identify upside potential while managing risk.
To illustrate this point, let’s look at a Brazilian aircraft manufacturer, which is the world’s third-largest after Boeing and Airbus. The once-overlooked company tightened costs, streamlined production, and benefited from a global shortage of new aircraft. Earnings per share then began to rise, validating our early conviction. Its turnaround shows how operational discipline, paired with improving industry dynamics, can unlock value in overlooked sectors.
See also: Emerging market stocks rise every month this year, first time since 1993
Corporate transformation can be equally powerful. The experience of China’s leading e-commerce and technology giant underscores this dynamic. Following a sharp share-price collapse in 2021-2022, its management pivoted to a cost-discipline agenda — streamlining operations, divesting non-core assets and launching a large share buyback programme. These moves, coupled with leadership changes, marked a decisive shift toward accountability and efficiency. Such self-help stories are increasingly common across the region, from China to South Korea, where governance reforms are gradually improving shareholder returns.
Supply-side discipline has also created selective opportunities. The shipbuilding industry in China is a striking example. Fifteen years ago, there were about 1,000 shipyards, which was far more than the market needed. Over time, many shipyards either shut down or merged, leaving only about 30 by 2018. During this time, we identified a Chinese shipyard listed in Singapore as one of the most efficient players in the industry. When the Covid-19 pandemic disrupted global logistics and container rates surged, demand for new and more environmentally friendly vessels skyrocketed. With fewer competitors and limited market capacity, its orders and profitability grew significantly.
Recent years have again shown that some of the best opportunities can surface during periods of stress. In late 2022, concerns about a US recession and rising interest rates weighed heavily on cyclical sectors. That downturn created an opening to identify companies such as a South Korean chip maker, which at the time was facing its weakest profitability in twenty years. Within twelve months, it had become a key supplier of advanced memory chips powering AI applications — a reminder of how swiftly sentiment can shift once fundamentals recover.
Meanwhile, as investor attention remains concentrated in technology, we see renewed strength emerging in more traditional industries — areas such as industrials, energy, mining and banking. As countries reinvest in manufacturing, defence, and supply-chain resilience, these underfunded sectors are beginning to benefit from years of constrained capacity. Together, they point to a more balanced and diversified phase of growth across emerging markets.
Emerging markets may offer more than just a tactical allocation—they present a potential strategic opportunity worth thoughtful consideration in today’s evolving market environment. For investors willing to look beyond the obvious, emerging markets may offer a compelling opportunity to rediscover growth, value, and resilience as global dynamics continue to shift. — © Project Syndicate, 2025
Ernest Yeung is a portfolio manager of the emerging markets discovery equity strategy at T Rowe Price
