Under the Radar: Why Now Is the Time for Emerging Markets

by Andrew Mathewson of ClearBridge Investments, 12/11/25

Key takeaways

Emerging market equities remain attractively valued and provide significant diversification benefits to investment portfolios.
The current dollar environment is advantageous for emerging market equities, both enhancing country-specific fundamentals and encouraging capital inflows to the asset class.
Structural growth factors such as advancements in technology and demographic trends continue to support long-term growth prospects in emerging markets.

Valuation

Emerging market equities have delivered strong results thus far in 2025, providing investors with year-to-date returns exceeding 30%. Despite this impressive performance, we believe the market recovery is still at an early stage, and that emerging markets (EM) continue to present significant upside, especially given their appealing valuations relative to developed markets. This valuation gap creates an opportunity for investors to tap into emerging market growth at favorable prices.

Lower dollar environment

EM equities tend to benefit from a stable or depreciating US dollar, making current conditions favorable for the asset class. This is a function of lower US-denominated debt servicing costs, commodity exporter tailwinds and increased monetary policy flexibility facilitating falling interest rates and supporting economic growth. Additionally, this environment comes hand-in-hand with improved investor sentiment, fostering a virtuous cycle as increased foreign capital flows into the regions further enhance potential investment performance.

Long-term structural drivers

Investing in emerging markets offers exposure to many countries offering economic growth rates, which have generally been faster than most developed nations. Additionally, EM provides exposure to the following long-term structural trends.

China Recovery: The Chinese economy is in the early stages of a policy pivot from a focus on deleveraging toward one that targets growth. This creates company-level investment opportunities and encourages more global investor flows to return to China.
AI Demand: The launch of China’s DeepSeek chatbot sent shockwaves around the world, highlighting Chinese advancement and shifting assumptions about the cost and scale needed for cutting-edge AI. In addition to China, several other EM countries are key developers of components critical for AI development, offering significant investment opportunities.
India Growth: India could offer great upside potential, in our view, as it remains the fastest-growing major global economy, benefiting from a large and young population. Indian valuations have seen a correction back to long-term levels, reinforcing the importance of active management to gain exposure to company-level opportunities.

More broadly, EM equities provide exposure to companies benefiting from accelerated technological adoption, demographic shifts such as urbanization and the expansion of the middle class and financial inclusion. These businesses have world-class innovation capabilities across an array of sectors, all of which benefit from substantial investment in research and development and intellectual property creation. We believe these fundamental trends establish a robust foundation for ongoing economic development and corporate earnings growth in emerging markets.

Positioning and diversification

In addition to offering potential return upside, EM allocations offer potential diversification benefits that can reduce overall portfolio risk. EM stocks often have different economic cycles and sector exposures compared to developed markets, providing investors the potential for less correlated returns and better risk-adjusted performance.

Such diversification can be particularly useful in periods when other asset classes struggle. For example, emerging markets have tended to outperform the US market during periods of low US returns. Specifically, in the rolling 10-year periods since 1971 when the S&P 500 Index has returned less than 6% annualized, the MSCI Emerging Markets Index has outperformed US equities every time while delivering an annualized return of 12.1%.¹

Footnotes:

^1. Note: Data as of September 30, 2025. Sources: Morningstar, S&P, MSCI.

DEFINITIONS

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the US.

The MSCI Emerging Markets Index captures large and mid-cap representation across 23 emerging markets (EM) countries. With 835 constituents, the index covers approximately 85% of the free float adjusted market capitalization in each country.

The MSCI EAFE Index is an unmanaged index of equity securities from developed countries in Western Europe, the Far East, and Australasia.

The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips and P chips. With 140 constituents, the index covers about 85% of this China equity universe.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

Diversification does not guarantee a profit or protect against a loss.

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