Can outperformance continue in 2026?
Emerging markets are poised to end 2025 on a high, as a flurry of positive momentum propelled their stock indexes to record highs that many expect will be extended even further in the new year. The MSCI Emerging Markets Index — comprised of large- and mid-cap stocks listed across emerging markets countries — has surged around 30% since the beginning of the year, outperforming all three major Wall Street averages. By comparison, the MSCI World Index, which only includes large- and mid-cap equities from developed markets including the U.S., has gained just over 20% in 2025. Certain countries in the cohort have had particularly stellar years. The Athens Composite — Greece’s benchmark index — for example, has surged nearly 44% over the course of the year, and will be upgraded to developed market status in Sept. 2026. The rise of emerging markets this year isn’t just down to a single, or even a handful, of individual country outperformances, however. Chile and the Czech Republic’s benchmark equity indexes are both by around 50.8% year-to-date, while Romania’s BET index has gained more than 42%. ‘The year of change’ At a roundtable event in London toward the end of November, fund managers at investment management firm Ninety One – which manages assets worth more than £152 billion ($203 billion) – struck a bullish tone, suggesting more upside is likely in various pockets of emerging markets in 2026. “If you were to summarize the year 2025 nicely in one word, it would be change — this is the year of change across multiple layers,” Varun Laijawalla, a portfolio manager in the firm’s emerging markets equities division, said. “The first level of change is there’s been one trade in the markets for the last 15 years. It’s been developed markets, which has really been the U.S., and that’s changed this year.” Laijawalla also noted that the dollar had weakened this year after “15 years of a one-way trade.” Since the beginning of the year, the dollar index – which measures the value of the U.S. dollar against a basket of major rivals – has dipped around 9%, a move that was first catalysed by the April selloff of U.S. assets that became known as the Sell America trade . A strong U.S. dollar can put pressure on emerging economies that rely on foreign capital, as it raises the local currency cost of dollar-denominated debt and can reduce investment inflows from abroad. .DXY YTD line U.S. dollar index Additionally, Laijawalla said, there had been a swathe of changes at the country level in 2025, pointing to China and South Korea as examples. The former, he said, had seen the emergence of DeepSeek – a challenger to the U.S. AI story – and a re-embracing of the private sector this year. Meanwhile, South Korea had a new government that had implemented much-needed corporate governance reforms. “Of the 24 markets we can invest in on the equity side, the one that has had persistent weak governance is Korea – so if you are tackling the major issue with that market, clearly that’s a huge, huge positive change in direction,” he said. The most notable tailwind of all, according to Laijawalla, is a change in net issuance – how stocks enter and leave public markets. “Why is this asset class underperformed developed markets? There’s one reason, and one reason only … net issuance, what we call dilution,” he said. “Over the last 15 years in emerging markets, the drag from net issuance has been enormous,” he said, pointing to a wave of IPOs, particularly in China. “That is the fundamental financial reason emerging market equities have underperformed the U.S. and developed markets. So if you look at that figure, net issuance over the last three years, net issuance in China, which has been the serial offender, is narrowing precipitously.” He added that there had also been a “quantum” of buybacks in China in 2024, and a broader shift in corporate capital allocation behavior that included an upswing in dividend payouts. “What I’m saying is that the headwind is quickly becoming less of a headwind, and at some point will become a tailwind,” he said. “And I think that concept is not understood at all by the market. That’s where the real Delta is … I think the setup for emerging markets has not looked this compelling for 15 years.” Emerging markets have not looked this compelling in 15 years Portfolio manager at Ninety One Varun Laijawalla Speaking to journalists at JP Morgan’s London headquarters, the investment bank’s Head of Global and European Equity Strategy Mislav Matejka said the in-house view was that emerging markets were heading for a second year of outperformance in 2026, snapping “years and years and years” of trailing returns. “For years, it was always the same call from our side, long DM, short EM,” he said. “But we have for this year, fully flipped on EM and China. From the equity perspective, we are overweight in a regional portfolio. We are buyers, whether it’s China or Korea or India, but [we’re buying] emerging markets overall for different reasons.” Some of the driving factors behind this position included attractive valuations, currency moves and economic growth trajectories, Matejka added. Adding to the optimism this year, was the improved performance of emerging market currencies and emerging market fixed income due to high rates, he told reporters, adding that we’re nearing the end of an easing cycle. “But when I look at the valuations of the EM relative to the DM, and also in absolute terms, we still have 30, 40, 50% discounts when we look at positioning of the global investors.” Many emerging markets economies are poised to become proxy beneficiaries of the global AI boom, according to JP Morgan, thanks to a consequential rise in demand for commodities like metals and energy. “Commodities workers in emerging markets are benefiting from these massive capex investments,” Luis Oganes, the bank’s head of global macro research, added at the same event. Speaking to CNBC’s “Squawk Box Europe” on Thursday, Stephen Isaacs, strategic advisor at Alvine Capital, labeled emerging markets “interesting” heading into 2026. “Latin America – the dominoes are beginning to fall there,” he said, pointing to political shifts favoring conservative policy in Argentina and Chile, and U.S. President Donald Trump’s focus on the region . “The focus on the western hemisphere, the power of ideas, American money, I think there is a revolution, a bit of a catch up going on in Latin America, and that’s a very interesting area,” he said. “Brazil’s the next one to catch up because you’ve got presidential elections next year, so that one’s a little bit behind the curve. I think they’re likely to eject Lula and have a conservative in there.”
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