Fund manager predictions for emerging markets in 2026

At last. After an extended period of dismal performance, emerging markets finally bounced back in 2025. The MSCI Emerging Markets Index, a global benchmark of equities in these countries, delivered a 30% return over the year to mid-December, compared to just 17% from the developed markets-focused MSCI World Index.

To put that data into context, emerging market investors have suffered negative returns in three of the past five calendar years; developed markets have outperformed in every year since 2020.

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It’s not that the fundamental attractions of markets in regions such as Asia or Latin America had changed. Developing economies still offer long-term structural strengths such as rapid rates of urbanisation and industrialisation, fast-expanding middle classes of consumers, and young populations. However, the uncertainties of the past five years – from Covid-19 to war in Ukraine and today’s geopolitical angst – have seen investors prefer developed markets perceived to carry less risk.

The strength of the US dollar has also been a major headwind, given that so many developing economies have significant dollar-denominated debts – and that a strong dollar sucks investment into America. Individual markets – not least China, with a debt crisis that policymakers initially struggled to get to grips with – have also found the going particularly tough.

This year, however, some of those pressures have started to ease, prompting investors to look again at the long-term attractions of emerging markets. And specialists are broadly optimistic about the outlook for 2026 and beyond.

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Qian Zhang, an investment specialist on Baillie Gifford’s emerging markets team, argues that the big picture for emerging markets is increasingly supportive. “Conditions are aligned for a continued bull run,” she says. That reflects a strengthening macro-economic backdrop, with current account deficits in many countries improving and exports on the rise; the weakening of the dollar in recent months means emerging markets will also begin to attract more investment once again.

“This is happening at a time when developing economies are becoming more central to our future,” Zhang adds. “Emerging markets companies are central to technologies such as semiconductor hardware, central to the building blocks of energy transition, and central to the innovation that we’re all benefiting from every day, from e-commerce and social media to electric vehicles and industrial robots.” 

John Citron, portfolio manager of JPMorgan Emerging Markets Growth & Inc (LSE:JMGI), points to valuations remaining attractive and earnings expectations strengthening. He adds: “Several macro trends, including a weaker US dollar and improving domestic demand, are now more supportive.”

Why China’s strong run in 2025 can continue this year

In Asia, China and India dominate, given the size of their economies. The Chinese stock market has performed well in 2025, despite slower economic growth and ongoing concerns about problems in the property market.

Simon Edelsten, chief investment officer of Goshawk Asset Management, thinks that can continue. “Growth seems to have come from a combination of very cheap valuations and China’s leading technology companies offering increasingly competitive artificial intelligence (AI) applications,” Edelsten points out. “China has the power and infrastructure required for this new technology while the West struggles with these basic engineering issues.”

The Chinese government appears ready to support its technology sector, with previous tensions over state control and political influence seemingly calmed following a summit earlier last year between President Xi Jinping and tech company leaders. And there still seems to be value on the table. The Chinese technology and AI giant Alibaba Group Holding Ltd ADR (NYSE:BABA), for example, trades on a forward price to earnings multiple of 17x, against 28x for Amazon.com Inc (NASDAQ:AMZN).

India lagged in 2025, but long-term prospects compelling

As for India, performance this year has been more mixed, with investors concerned about high valuations following several years of stellar returns. However, Robert Marshall-Lee, chief investment officer of Cusana Capital, argues: “India probably has the best long-term prospects of any major global equity market – it could be one of the best-performing stock markets over the next decade.”

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One attraction of India is the strength of domestic demand, leaving it less vulnerable to the trade tensions still unnerving many investors as US President Donald Trump continues with his tariffs policies.

“The Indian market is awash with high-quality, well-governed franchises with extensive growth runways – backed by demographics, expanding distribution networks, and rising disposable incomes,” says Marshall-Lee. “What might be low-growth sectors in the West can prove high-growth opportunities in India. For example, the average Indian consumes about four litres of carbonated beverages annually, compared with 150 litres in Mexico and the US.”

Reasons for caution

That’s not to suggest these markets come with no risks attached. In China, for example, Raheel Altaf, manager of the Artemis SmartGARP Global EM Equity I Acc GBP fund, says that he is hopeful of further gains, particular in innovation sectors such as AI, electric vehicles and sustainable energy, but he also warns of headwinds.

“Competition is tight in these fields and that’s likely to weigh on profits,” Altaf say. “We’re expecting volatility in AI-related stocks in the near future, so we took profits from mega-cap technology and e-commerce companies towards the end of 2025; we’ve rotated into internet, industrial and commodities names instead.”

Similarly, in India, Baillie Gifford’s Zhang worries that valuations remain stretched. “That makes us very selective,” she says. “We prefer resilient business models at sensible multiples and are very aware at the portfolio construction level of what other competing investment opportunities we could own in other emerging markets.”

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There’s also the tariff question to consider, with Asian countries often in the US’ protectionist firing line, given the high trade surpluses they enjoy with America. One big advantage for emerging markets is their low costs, but the gain is reduced or even eliminated when importers in the US must pay high tariffs on goods produced in these countries.

That could be a problem across the region, although fund managers nonetheless point to additional opportunities in Asian emerging markets, particularly given global demand for key components in the technology revolution.

“Taiwan and South Korea continue to play important roles as major suppliers of essential components, from memory chips to advanced processors and data-centre hardware,” says JPMorgan’s Citron. “Companies such as SK Hynix and Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) have already benefited from accelerating demand, and the ongoing build-out of AI capabilities worldwide is likely to sustain investment here.”

Landmark 81, a super-tall skyscraper, and the Saigon bridge can be seen in the centre of Ho Chi Minh City, Vietnam. Photo: Khoa Nguyen via iStock.

Vitenam upgraded from frontier to emerging market

Vietnam is another country catching the eye, with FTSE Russell upgrading it to emerging market status earlier this year; previously, it was considered a frontier market, and therefore not eligible for inclusion in many emerging market funds, both active and index trackers.

The country has spent much of the past 20 years integrating itself into global supply chains through high-volume, cost-efficient manufacturing – it now makes around half of Samsung’s phones, for example – but also has a growing consumer base, thanks to a young population with rising disposable incomes, and a pro-business government.

“Vietnam offers the rare combination of policy momentum, manufacturing competitiveness and domestic demand,” says Zhang. “It’s still a lesser-known and off-index market, and we remain selective, but the opportunity set is broadening for long-term, patient investors.

Are stars aligning for emerging markets?

As for other emerging markets regions, investors have paid less attention to Latin America in recent times, partly because of the strengths of the technology sector in Asia. However, Goshawk’s Edelsten believes the relatively cheap valuations of Brazilian equities look increasingly attractive, despite the potential for trade tensions with the US.

“Brazil is certainly not one of Trump’s favourite countries because of its left-wing politics but even he can’t start a fight with everyone at once,” he explains. “Inflation there has come down to 4.5%; it’s got population growth at a time when fertility is becoming a problem the world over; and it is a big supplier of commodities, which look like going up in price.”

The bottom line? Market analysts believe the stars are aligning for emerging markets – albeit with the caveat that volatility may continue and that this year’s stellar gains will be difficult to replicate.

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Think-tank Capital Economics expects economic growth across emerging markets as a whole to slow to around 3.5% in 2026, the weakest rate for three decades. But that largely reflects its downbeat assessment of the growth prospects for China, Brazil and Russia, three of the largest emerging markets.

“Many other emerging markets are likely to see rapid or accelerating growth – notably India but also parts of Southeast Asia, central Europe and North Africa,” the Capital Economic emerging markets team conclude. “Emerging market equity markets are likely to post solid gains next year, particularly in Asia, which should continue to benefit from AI enthusiasm.”

In other words, emerging markets appear to be back in business