Emerging market equities returned to prominence during 2025 after several years in which investor attention had been dominated by US markets. A combination of shifting macroeconomic expectations, changes in the interest rate cycle and renewed demand linked to artificial intelligence infrastructure has helped bring the asset class back into focus. Against this backdrop, the investment case for emerging markets entering 2026 rests on structural developments that may influence capital flows, earnings growth and market positioning in the years ahead.
Valuations remain a central part of the discussion. Even after the renewed interest in the asset class during 2025, emerging market equities continue to trade at a substantial discount to developed markets. For much of the previous decade this valuation gap widened as China’s economic slowdown, a strong US dollar and higher global interest rates weighed on sentiment. These factors contributed to a prolonged period of relative underperformance and multiple compression across the broader emerging market universe. More recently, several of those pressures have begun to ease. Moderation in the US dollar, lower global interest rates and improving momentum in selected commodity markets have supported the outlook.
Fiscal dynamics also differentiate many emerging economies from their developed market counterparts. In the aftermath of the pandemic, several developed economies implemented significant fiscal support programmes to stabilise domestic demand. By contrast, many emerging markets adopted more restrained fiscal policies, in some cases actively tightening financial conditions. This divergence has left parts of the emerging market universe with comparatively stronger fiscal positions.
A softer US dollar reduces the cost of servicing dollar denominated debt across emerging markets and may help ease imported inflation pressures. Currency stability can in turn support domestic consumption and provide a more constructive environment for local financial markets. Importantly, the relationship between emerging markets and the US dollar has evolved over time. Many economies have developed deeper local capital markets and reduced their reliance on external dollar borrowing, which means the investment case for the asset class is less dependent on currency movements than in previous cycles.
Monetary policy dynamics add another layer to the outlook. A number of emerging market central banks moved early to raise interest rates during the global inflation surge of 2021 and 2022. As inflation pressures moderate, those earlier policy decisions have left several economies with relatively high real interest rates. This creates scope for further policy easing if global conditions permit, potentially providing support for domestic investment activity and equity valuations.
Earnings growth expectations also play a role in shaping investor sentiment. Forecasts suggest that earnings expansion across emerging markets may accelerate in the coming years, supported by both technology oriented economies and commodity producing countries. Several Asian markets occupy a central position in the global semiconductor and artificial intelligence supply chains, supplying key components used in data centres and digital infrastructure. At the same time, resource rich economies benefit from demand linked to electrification, energy transition technologies and industrial expansion.
China remains a significant component of the emerging market universe and therefore requires careful consideration. While consumer related sectors continue to face challenges, several industrial and technology focused segments are demonstrating rapid development. Advances in batteries, semiconductor components and robotics highlight areas where Chinese companies are moving further up the value chain.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
