After a 30% rebound, fund managers see tailwinds—but warn the easy gains are over
MARKET INSIDER – After years in the wilderness, emerging markets staged a powerful comeback in 2025. The MSCI Emerging Markets Index delivered a near-30% return by mid-December, decisively outperforming the MSCI World Index. For global investors who endured three negative EM years out of the past five, the rally has revived a crucial question: was 2025 a one-off rebound—or the start of a sustained cycle?
Fund managers broadly lean toward the latter, though with important caveats. Structural drivers that long defined emerging markets—urbanisation, industrialisation, youthful demographics, and expanding middle classes—never disappeared. What changed in 2025 was the macro backdrop. A softer US dollar, easing current-account pressures, improving exports, and more realistic valuations have drawn capital back to markets investors avoided during years of pandemic shocks, war, and geopolitical stress.
According to Qian Zhang of Baillie Gifford, conditions are increasingly aligned for a continued bull phase. Emerging-market companies are no longer peripheral to global growth; they sit at the heart of semiconductor hardware, electric vehicles, renewable energy supply chains, e-commerce, and industrial automation. John Citron of JPMorgan Asset Management adds that valuations remain attractive while earnings expectations are firming—an unusual but powerful combination.
China remains the market to watch. Despite slower GDP growth and lingering property-sector stress, Chinese equities delivered strong returns in 2025. Simon Edelsten of Goshawk Asset Management attributes the rally to a mix of depressed starting valuations and renewed confidence in China’s technology sector, particularly artificial intelligence. Unlike the West, he argues, China already has the power infrastructure and engineering capacity needed to scale AI. A thaw in relations between Beijing and tech leaders—following high-level engagement by Xi Jinping—has further improved sentiment. Even after the rebound, valuation gaps persist: Alibaba Group trades at a forward multiple far below that of Amazon, keeping value investors engaged.
India tells a different story. Performance lagged in 2025 as investors balked at rich valuations after years of outsized gains. Still, long-term conviction remains strong. Robert Marshall-Lee of Cusana Capital calls India the most compelling major equity market of the next decade, citing resilient domestic demand, strong corporate governance, and favorable demographics. Crucially, India is less exposed to global trade shocks at a time when tariff policy under Donald Trump continues to unsettle export-led economies.
Selectivity, however, is becoming essential. Raheel Altaf of Artemis Investment Management warns that competition in AI, EVs, and clean energy could compress margins, particularly in China. His team has already rotated away from mega-cap tech into industrials, internet platforms, and commodities to manage volatility. Even EM bulls acknowledge that stretched valuations in parts of India demand discipline rather than blind optimism.
Beyond the giants, Vietnam is emerging as a new focal point. Upgraded this year by FTSE Russell from frontier to emerging-market status, Vietnam is now eligible for a broader universe of global funds. With deep integration into global manufacturing—producing roughly half of Samsung Electronics’ smartphones—and a young, increasingly affluent population, the country offers what Zhang calls a rare mix of policy momentum, competitiveness, and domestic demand.
Latin America, meanwhile, remains under-owned. Yet markets like Brazil are attracting renewed attention as inflation cools and commodity exposure becomes attractive again. Even political friction with Washington may not derail valuations that already price in a high degree of risk.
The consensus takeaway is nuanced. Emerging markets look structurally better positioned than at any point since before the pandemic, but repeating a 30% annual return will be difficult. Volatility is likely to persist, leadership will rotate, and country selection will matter more than ever. For patient investors willing to tolerate swings, 2026 may not deliver another surge—but it could confirm that emerging markets are back as a strategic allocation, not just a tactical trade.
