Emerging markets are on the cusp of a remarkable resurgence in 2026, poised to outpace developed economies by leveraging deep-seated structural drivers and timely cyclical tailwinds. Investors who recognize and embrace these opportunities stand to benefit from a landscape that is both dynamic and transformative.
Secular Trends Fueling Long-Term Growth
At the heart of this momentum are fundamental shifts that have been unfolding over the past two decades. Emerging economies now command a lion’s share of global growth, reshaping traditional power balances and investment narratives.
Key secular drivers include:
- population growth and rising middle class in India and Southeast Asia, fueling consumption.
- Ongoing reforms in finance, pensions, and governance, enhancing market efficiency.
- Urbanization and infrastructure development, closing persistent gaps.
- Expanding digital adoption and rising female workforce participation.
Collectively, these factors underpin a resilient growth trajectory, with emerging markets expected to sustain 3.3–4% trend-like growth through 2027, outpacing many advanced economies.
Emerging markets now account for 51% of global GDP and contributed nearly 67% of world growth over 2015–2025. Despite under-ownership, EM equities trade at a forward P/E of 14x for 2026, offering a valuation discount of over 20% relative to developed markets. January 2026 inflows reached $12.7B into EM ETFs, driving average one-year returns of 36% versus 14.4% for the S&P 500.
Cyclical Tailwinds Amplifying Performance
Near-term catalysts are aligning to turbocharge this structural strength. A weakening US dollar, driven by Federal Reserve rate cuts and US macro stresses, is prompting capital flows towards higher-yielding assets in growing regions.
Key cyclical tailwinds include:
- weaker US dollar and negative real rates supporting currency and equity gains.
- Lower global borrowing costs, enabling central bank rate cuts across Brazil, Indonesia, and South Africa.
- Record ETF inflows—$12.7B into emerging markets in January 2026 alone, signaling strong investor appetite.
- Reduced US tariffs and shifting supply chains, improving emerging market resilience.
This confluence of factors has historically marked the start of multi-year outperformance cycles for these economies, as capital allocators chase yield and growth.
Thematic Catalysts: Technology and Sustainability
Emerging markets are no longer confined to commodities and manufacturing. They now host leading technology players and are at the forefront of sustainable finance initiatives.
In technology, Taiwan and Korea account for two-thirds of global memory chip capacity, while China leads in AI training clusters. E-commerce platforms in India and Southeast Asia are doubling user bases year over year, signaling robust digital monetization prospects.
In Africa, multilateral development banks are financing solar mini-grids, electrifying rural communities. Latin American nations are issuing green bonds to fund reforestation and clean transport projects, reflecting emerging market leadership in climate finance innovation.
Investors can tap into:
- Renewable energy developments, driven by public–private partnerships.
- Inclusive urbanization and smart city projects.
- Next-generation digital infrastructure for e-commerce and fintech.
Standout Markets to Watch
Although the broad narrative supports emerging markets collectively, certain regions are especially noteworthy for their unique growth drivers and reform agendas.
Risks and Considerations
No investment is without challenges. Emerging markets face potential headwinds from geopolitical tensions, trade policy shifts, and occasional volatility around elections and commodity cycles.
Notable risks include:
- Renewed US–China trade frictions beyond November 2026.
- Global central bank policy divergences causing episodic market swings.
- Delays in structural reforms, particularly in consumer credit and capital markets.
However, many of these economies have diversified away from pure commodity dependence and now exhibit characteristics akin to developed markets, albeit with faster growth potential—diversified like developed markets but with superior growth.
Strategies for Investors
For portfolio architects seeking to capitalize on this trend, prudent allocation and active risk management are key. Consider blending hard and local currency debt instruments to capture yield and currency appreciation, while selectively overweighting quality equities in technology and sustainable infrastructure.
Additional guidance:
- Build exposure via ETFs and mutual funds focusing on quality EM equities with strong balance sheets.
- Incorporate ESG criteria to identify countries with robust governance and environmental commitments.
- Monitor central bank policy decisions for timing entry and exit points in high-duration bonds.
- Combine active managers for single-country expertise with passive strategies for broad diversification.
When constructing portfolios, investors may consider blending active and passive approaches. Active managers can target idiosyncratic opportunities in single-country mandates, while passive allocations ensure broad exposure. Incorporating ESG criteria can screen for countries with robust governance and environmental commitments, potentially mitigating long-term risks.
Looking Ahead
Emerging markets stand at a pivotal moment. With secular structural reforms intersecting with favorable cyclical environments, they offer a rare convergence of growth, valuation, and thematic appeal.
As Ygal Sebban of GAM aptly notes, "This is just the start" of a new chapter for these economies. Meanwhile, Merrill Lynch’s CIO underscores a "rare alignment of global growth, currency shifts" that could define investment returns for the next decade.
The rhythm of global capital is shifting, and those who heed the signals of change will find themselves at the forefront of the next economic wave. By weaving emerging markets into diversified portfolios, investors not only seek attractive returns but also contribute to sustainable growth narratives that can uplift societies worldwide.
Embark on this journey with a balanced, research-driven strategy, and witness how emerging markets can transform your portfolio and contribute to broader, inclusive prosperity.
