Emerging Markets Offer Attractive Opportunities

The stock indices of emerging markets (EM) have, to put it mildly, struggled to keep pace with the global stock market in recent years. One of the main reasons for this development was the pronounced dominance of the US stock market, often explained by the concept of American exceptionalism — which, quite unassumingly, posits that the United States plays a unique role in world history and is fundamentally different from other nations.

Comparisons are not entirely unfounded, as we elaborated in detail in our blog post on this topic last year. The robust development of the US stock market was based on a mix of superior earnings growth and continuously rising valuations, especially in relative terms. Even then, we concluded that it seemed prudent to also pursue diversification at the regional level and actively seek opportunities around the globe. In 2025, US stocks still achieved an 18.5% gain, narrowly trailing the global stock index, which registered an annual return of 21.6%. However, with an investment in the MSCI Emerging Markets Index, a significantly higher return could be achieved over the same period, as the following graph illustrates.

Emerging Markets have endured a prolonged period of underperformance

A look at the recent years reveals, as initially hinted, that emerging markets lagged significantly behind the world stock market from 2021 to 2024 and still bear a cumulative underperformance of more than 56% even after the strong year of 2025. Assuming a certain catch-up potential based on this, a fresh look at emerging market stocks is worthwhile.

The five pillars of our positive EM thesis

We base our investment case on the analysis of the following five areas: Economic Cycle, Monetary and Fiscal Policy, Corporate Earnings & Sectors, Valuations & Flows, and Geopolitics, which are discussed in detail below.

Economic Cycle

In October 2025, the International Monetary Fund (IMF) published its updated world economic growth forecasts. According to this report, the global economy is expected to grow by just over 3% in 2026, with slight acceleration in 2027. Regionally, however, experts anticipate significant differences. Developed countries, including the USA, Central Europe, and Switzerland, are expected to grow by around 1.6%, while emerging markets are anticipated to grow by around 4%. Contrary to initial concerns, China succeeded in cushioning the trade barriers imposed by the United States through higher exports to other world regions. Although the Middle Kingdom is still grappling with a real estate crisis that hampers domestic consumption, the government is determined to defend the growth target of 5%, regularly leveraging its fiscal and monetary capabilities. Easing trade barriers would provide further relief.

Overall, we see emerging markets better positioned to handle periods of increased uncertainty in global financial markets, as economic policy frameworks have been continuously improved in recent years. Moreover, political conflicts and dependence on currency interventions have been reduced. As a result, central banks in many emerging markets are better equipped to tailor local financing conditions to needs, although the influence of US monetary policy remains undeniable. The described environment could also positively affect capital flows toward emerging markets in the medium term, as better policies and a more stable environment lead to increased predictability and willingness of foreign investors to make local capital investments. This, in turn, would have a positive impact on growth prospects.

In particular, China has invested heavily in innovation in recent years and, according to the World Intellectual Property Organization, broke into the top 10 most innovative countries for the first time in 2025, while Korea rose from sixth to fourth place, directly behind the USA (3), Sweden (2), and Switzerland, which continues to lead the ranking. Asia is no longer just the world's workshop, where cheap goods of low quality and value addition are produced. The complexity of China's export goods has increased significantly; the gap to the USA is gradually closing. Furthermore, Korea is home to Samsung, the world's second-most important chip contract manufacturer after TSMC, headquartered in Taiwan. As such, goods related to the booming field of artificial intelligence have also become a relevant economic factor for emerging markets.

Adding to the positive economic environment is the weak US dollar. The greenback depreciated significantly in 2025, and we assume that this trend is likely to continue in 2026. Typically, a weak US currency is positive for emerging market stocks, as it makes imports cheaper and reduces inflationary pressure, allowing central banks greater monetary policy leeway. Furthermore, a weaker dollar favors capital flows toward emerging markets, while domestic companies find it cheaper to service USD debts, reducing balance sheet risks.

Monetary & Fiscal Policy

Most central banks in emerging markets are expected to further cut interest rates. Since many EM central banks started their restrictive cycle early and stronger, they can now ease earlier. In key markets such as Brazil, China, Mexico, South Korea, India, or Taiwan, the market thus expects reductions or at least maintaining the current interest rate level. The easing of financing conditions would support growth, valuations, and risk appetite.

The fiscal space in emerging markets, measured by budget balance and government debt, is also often larger than in developed markets. However, these conditions are not uniform: many EMs need to obtain part of their financing in foreign currency (currency risk), and due to higher inflation and default risks, they face more restrictive financing conditions. At the same time, however, historically required fiscal discipline in EM contrasts with the significantly higher spending and indebtedness inclination of many developed markets. Questions regarding the sustainability of state debts and derived permanently higher interest rates are a relevant risk, especially for the USA, Japan, and parts of Europe. Thus, major heavyweights in the EM stock universe, such as China or South Korea, have sufficient buffers for further fiscal stimuli.

Global liquidity has significantly increased since the low point at the end of 2024 — an environment from which stock markets in emerging markets have historically benefitted disproportionately. As available liquidity rises, more capital flows into EM stocks relatively, seeking higher, often riskier returns. Typically, these stocks react more sensitively to inflows and outflows due to less market breadth and higher dependence on capital flows compared to established markets. Moreover, a liquidity increase often accompanies a "risk-on" sentiment, from which investments in EM benefit disproportionately.

Corporate Earnings & Sectors

The combination of positive economic growth and monetary and fiscal policy leeway creates the ideal environment for growing corporate earnings. As the following graph shows, earnings forecasts for the next 12 months (rolling) hit a floor by mid-2023 and have been continuously revised upwards since then.

High Dynamics in EM Earnings Estimates

Since the end of 2025, this development has further accelerated, which we attribute, among other things, to the market's reevaluation of the potential of AI winners in emerging markets such as TSMC, Samsung Electronics, or SK Hynix. TSMC is the largest contract manufacturer of semiconductors and thus the pivot of the industry, while Samsung Electronics, alongside its role as a manufacturer, also engages in chip development and, for instance, supplies memory components to NVIDIA. The South Korean company SK Hynix is among the world's largest semiconductor manufacturers and has recently gained awareness among many investors due to its leading role in developing and producing high-bandwidth memory chips.

In our view, however, the potential of EM goes beyond diversification opportunities in artificial intelligence. Besides the technology companies, mainly based in Asia, the emerging markets universe also includes a high share of companies from sectors such as finance, cyclical consumption, raw materials, and energy, which exhibit cyclical characteristics. These should benefit disproportionately from the positive economic environment. Moreover, they give certain countries a geopolitically important negotiating advantage when the relevance of raw materials for the world economy comes back to the forefront. All in all, we consider it quite realistic for earnings growth in emerging markets to surpass that of developed countries in the coming years and be increasingly broadly supported.

Valuations & Flows

Besides earnings growth, the most important factor for expected stock price developments is the valuation level, for instance, measured by the Price-Earnings-Ratio (P/E). In absolute terms, this metric for emerging markets rose from around 11.2x at the end of 2022 to currently about 13x. Hence, the valuation level increased by approximately 20%. However, since the valuation of the global stock market also rose during this period, it's worth looking at the difference in P/E ratios per region. To illustrate: currently, the MSCI World trades at a valuation multiple of 20x, compared to the aforementioned 13x in emerging markets. To determine whether EM is now historically relatively cheap or expensive, we compare the current difference (about 7x) with the historical average of 4.7x over the last 15 years.

EMs still trade at a historically above-average valuation discount

Assuming at least a return of the valuation difference to the historical average, there is an opportunity for further valuation expansion alongside attractive prospects for higher earnings growth.

Additionally, emerging markets are still relatively underrepresented in the portfolios of many global investors due to the prolonged period of weak returns and US dominance in recent years — a situation akin to that of Japanese equities about two years ago. Should the conviction grow that the current scenario justifies higher allocation in emerging markets, it could lead to inflows, positively impacting stock prices.

Geopolitics

Emerging markets appear significantly more investable today — not despite, but because of the geopolitical environment. Geopolitical tensions are no longer just a "risk-off" trigger; they currently drive the structural reorientation of global supply chains: production is becoming more regional, substitution capacities are being paid for, and capacities are shifting to locations where reliability, costs, and market access fit.

Multinational companies are reducing dependencies on individual locations. Countries that offer themselves as alternative or additional locations, such as Mexico through nearshoring production to North America, Vietnam and South Korea as export-focused manufacturing and electronics hubs, and India as a scalable platform for electronics, benefit notably. The reality of this shift is displayed in strategic programs for nearshoring opportunities (Mexico) and concrete investment decisions by global players (e.g., Apple's supply chain in India).

Global megatrends such as the energy transition or technological progress (especially AI and data center expansion) require immense resources. Controlling critical inputs (copper, nickel, lithium, rare earths, fossil fuels, etc.) affords significant strategic negotiating power. Individual emerging markets could benefit long term from a so-called structural commodity supercycle. For instance, Indonesia has massively expanded its role in the nickel market and become a pivotal point in the battery supply chain. With its abundance of resources and correspondingly resource-heavy stock market, Brazil positions itself increasingly with strategically important minerals and strives to retain more value addition in the country. Meanwhile, China, particularly concerning rare earths (critical for e-cars, industry, and electronics), represents a bottleneck, especially in separation/refinement (about 90% market share) and extraction (about 60 to 70% market share). Through export controls or licenses, Beijing can strategically manage availability to its advantage — a recently visible risk for global supply chains.

We increase our allocation in emerging markets at the expense of Swiss stocks

Emerging market stocks have suffered in recent years, partly due to the strong dominance of North America, struggling to keep up with the global stock market. However, 2025 marked a potential turning point, with EM stocks among the winners and US stocks losing some of their luster. We see a multitude of arguments that the catch-up rally could continue. At its core, however, our positive thesis is based on the five areas: Economic Cycle, Monetary & Fiscal Policy, Corporate Earnings & Sectors, Valuations & Flows, and Geopolitics, where we each identify constructive signals. Accordingly, we have upgraded our assessment of the regions Far East excluding Japan and Latin America from neutral to positive. In contrast, we utilize the strong run of Swiss stocks (+24% since the end of 2024 compared with +7% for the MSCI World in CHF) for profit taking and downgrade our assessment from positive to neutral.

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