Emerging Markets: From the Sidelines to the Spotlight

For over a decade, emerging markets (EM) have been the underrepresented segment of global portfolios. U.S. mega-caps dominated flows and headlines, while the developing world received little attention. Yet markets tend to turn when consensus has moved on. In 2025, the weight of evidence suggests the shift is underway.

1. Performance: Year-to-Date Through August 2025

As of August 31, 2025, EM equities are ahead of U.S. and developed market peers:

MSCI Emerging Markets Index ETF: ~+20.3% YTD (Source 1)

S&P 500 ETF: ~+10.7% YTD (Source 1)

2. Growth and Earnings: Beyond China

Earnings momentum is the more compelling story:

• India: Mid-teens EPS (earnings per share) growth forecast for 2025–26 (Source 5)

• Korea: Semiconductor cycle recovery; >20% EPS growth expected (Source 6)

• Brazil: Commodity leverage + reform agenda; >20% EPS growth forecast (Source 7)

• Developed Markets: Struggling to sustain low-teens growth (Source 8)

Ex-China, EM growth looks even more competitive (Source 9).

Note on China (Source 19): While China remains the largest EM component, its earnings picture is clouded by ongoing property sector stress and policy uncertainty. This has dampened aggregate EM growth rates. However, selective sectors — such as renewables, EVs, and consumer technology — continue to show pockets of resilience.

3. Valuations: Wide and Persistent Discount

• MSCI EM: ~14–15× trailing earnings

• S&P 500: ~27–30× trailing earnings (Source 10)

• Discount: ~45–50% — among the widest in decades

PEG Ratios

Valuation adjusted for growth underscores the gap:

• Brazil: ~0.5 (Source 7)

• Korea: ~0.6 (Source 6)

• Taiwan: ~1.1 (Source 11)

• U.S.: ~2.0 (Source 10)

• MSCI World: ~3.0 (Source 10)

Sidebar – Quick Definitions

• P/E (Price/Earnings): Price per share ÷ earnings per share.

• PEG (Price/Earnings-to-Growth): P/E ÷ EPS growth rate. PEG < 1.0 implies growth at a discount; PEG > 2.0 suggests premium pricing.

4. Positioning: Underweight but Reversing

• EM remains below its 20-year portfolio allocation average (Source 12).

• BofA survey: EM overweight at highest since early 2023 (Source 2).

• Reuters: EM funds saw their second-largest monthly inflows in four years in August 2025 (Source 13).

Reversion toward historical allocations could imply significant incremental flows.

5. Structural Drivers

What makes EM different today is that long-term growth isn’t just about exports — it’s also being driven by domestic structural forces:

• Middle Class Growth (Source 14)

  • Why it matters: By 2030, more than half of the world’s middle class will live in EM countries. A growing middle class buys more homes, cars, healthcare, education, and technology.

  • Investor takeaway: Rising consumer demand creates a self-sustaining growth engine that doesn’t rely only on exports.

• Supply Chain Diversification (Source 15)

  • Why it matters: Multinationals are moving parts of their manufacturing away from China into India, Vietnam, and Eastern Europe. This builds local jobs, infrastructure, and capital markets.

  • Investor takeaway: Countries benefiting from supply chain shifts may enjoy faster industrial growth and foreign investment.

• Technology & Healthcare Expansion (Source 16)

  • Why it matters: EM companies are no longer just resource exporters — they’re becoming leaders in AI hardware, fintech, biotech, and digital services. This broadens their role in the global economy.

  • Investor takeaway: Exposure to EM can now mean access to innovation sectors once thought of as developed-market only.

👉 For newer investors: Think of these structural drivers as long-term tailwinds — like strong winds at a sailor’s back. They don’t guarantee smooth seas, but they help push EM forward regardless of short-term market volatility.

6. Differentiation Matters

Emerging markets are not a single story. Each country brings different strengths — and risks. For investors, understanding the differences is key:

• India (Source 5, 15)

  • Why it matters: India is benefiting from a “demographic dividend” (a young, growing workforce) and major digital reforms (like its national payments system). These trends help drive long-term consumer demand and corporate profits.

  • Investor takeaway: India is often seen as the most consistent EM growth story.

• Korea & Taiwan (Source 6, 11)

  • Why it matters: Together, they dominate the semiconductor supply chain — the “picks and shovels” of the AI and data economy. Despite this, they are valued at lower multiples than U.S. tech peers.

  • Investor takeaway: Exposure here provides a way to invest in AI and tech hardware at lower valuations.

• Brazil (Source 7)

  • Why it matters: A commodities powerhouse (soybeans, iron ore, oil) that also has momentum on fiscal reform. But its currency can be volatile, which impacts returns.

  • Investor takeaway: Offers upside when commodities rise, but investors must accept higher swings in performance.

• China (Source 19)

  • Why it matters: China remains the largest single weight in EM indices, but faces persistent property sector stress and policy uncertainty. At the same time, selective areas — including renewable energy, EV supply chains, and consumer technology — still attract investment and benefit from targeted stimulus.

  • Investor takeaway: China is a complex allocation decision. Some investors underweight or separate it from EM exposure, while others pursue selective opportunities despite broader macro headwinds.

• Eastern Europe (Source 15)

  • Why it matters: Countries like Poland and Czech Republic have strong links to the EU, skilled labor forces, and growing consumer markets. They also serve as manufacturing hubs for Europe.

  • Investor takeaway: Provides industrial and consumer exposure with geographic diversification, though geopolitical risk remains.

👉 For newer investors: Think of EM as a team roster. India may be the star striker, Korea and Taiwan are the playmakers in tech, Brazil is the powerful defender tied to commodities, China is the unpredictable but influential captain, and Eastern Europe is the steady midfielder supporting Europe’s supply chain. Together, they bring balance — but each plays a different role.

7. Risks: Material but Recognized

• Dollar strength (Source 17)

  • Why it matters: The U.S. dollar is trading well above its long-term fair value, based on purchasing power parity (PPP).

  • Investor takeaway: A strong dollar hurts EM because it makes exports less competitive and increases the burden of servicing dollar-denominated debt. If the dollar weakens, EM currencies and equities could benefit.

• Trade policy (Source 18)

  • Why it matters: Tariff risk remains elevated in the U.S. and EU, especially during the 2025 election cycle.

  • Investor takeaway: Shifts in trade policy could create volatility in EM, particularly in export-driven economies.

• China (Source 19)

  • Why it matters: Ongoing property sector weakness and policy uncertainty weigh on China’s growth and investor sentiment.

  • Investor takeaway: Broader EM indices feel the drag, but selective sectors in China still present opportunities.

• Geopolitics (Source 20)

  • Why it matters: Flashpoints in Eastern Europe and the South China Sea continue to create regional instability.

  • Investor takeaway: Political risk premiums remain embedded in EM valuations, contributing to volatility.

• Liquidity sensitivity (Source 13)

  • Why it matters: EM rallies often depend on foreign inflows, which can reverse abruptly in times of stress.

  • Investor takeaway: Investors need to be prepared for sharper swings in market performance.

👉 Bottom line: Risks in EM are real and persistent, but many are already reflected in discounted valuations.

8. Triggers to Monitor

Investors don’t need to time markets perfectly. Instead, watching key signals (“triggers”) can help identify when the EM thesis is strengthening:

• Softer dollar / Fed pivot (Source 17)
  A weaker U.S. dollar makes EM assets more attractive, because local currencies strengthen and dollar-denominated debt becomes easier to manage. If the U.S. Federal Reserve shifts toward cutting rates, that often provides a tailwind for EM equities.

• Semiconductor super-cycle (Source 6, 11)
  Korea and Taiwan dominate global chip production. If demand for semiconductors surges — driven by AI, data centers, or consumer electronics — these economies could re-rate higher, boosting EM indexes overall.

• Commodity strength (Source 7)
  Countries like Brazil, South Africa, and Chile are major exporters of oil, metals, and agricultural goods. Rising commodity prices improve their trade balances, corporate profits, and equity performance.

• Reform progress in India (Source 5)
  India’s growth story hinges on continued reforms — from digital infrastructure to tax policy. When reforms gain traction, investor confidence grows, and inflows follow.

• Allocation reversion (Source 13)
  Global investors are still underweight EM compared with historical averages. Even a modest return toward normal allocation levels could release significant new capital into EM markets, supporting prices further.

👉 For newer investors: Think of these triggers as scoreboard signals. When multiple lights turn green — dollar weakness, stronger commodities, semiconductor demand — it means conditions are aligning for EM outperformance.

9. Conclusion

The case for EM is evidence-based:

• Superior earnings growth

• Persistent valuation discounts

• Structural demographic and consumption tailwinds

• Portfolio underweights beginning to shift

Risks are real, but increasingly priced. The question is timing — whether investors adjust exposures before or after flows accelerate.

References

1. Koyfin – Performance data through August 31, 2025: MSCI EM ~+20.3% YTD; S&P 500 ~+10.7% YTD

2. Financial Times – Bank of America Global Fund Manager Survey, 2025

3. Reuters – EM indices +17% YTD through July

4. MarketWatch – Non-U.S. equities +16.6% YTD vs. S&P 500 +7.1%

5. Goldman Sachs Research – India EPS growth forecasts, 2025–26

6. Morgan Stanley Research – Korea semiconductor EPS growth outlook

7. J.P. Morgan – Brazil EPS growth and PEG estimates

8. IMF World Economic Outlook – DM EPS forecasts

9. EastCapital – EM ex-China growth analysis

10. WorldPE & GuruFocus – Trailing P/E data as of Sept 2025: MSCI EM ~14.8×; S&P 500 ~27–30×; MSCI World PEG ~3.0

11. Taiwan Semiconductor Industry Association – EPS and PEG data

12. BlackRock – Global portfolio allocation data

13. Reuters – EM inflows, Aug 2025

14. OECD – Middle Class Outlook 2030

15. McKinsey Global Institute – Supply chain diversification

16. Lazard Asset Management – EM sector growth analysis

17. BIS – Dollar valuation vs. PPP

18. Politico – U.S./EU tariff policy, 2025 elections

19. Bloomberg – China property sector analysis (used in Section 6: Differentiation Matters)

20. CSIS – Geopolitical flashpoints

Disclosure

This material is provided for informational and educational purposes only. It does not constitute investment, legal, or tax advice, nor does it represent an offer or solicitation to buy or sell any security. The views expressed are based on information believed to be reliable as of the date of writing but may change without notice. Past performance is not indicative of future results. Investing in emerging markets involves risks, including currency volatility, political instability, and liquidity risk, which may result in loss of capital. Investors should consult a qualified financial professional to determine the suitability of any investment strategy.