2025 is on course to be the first year in five in which emerging markets equities outperformed U.S. stocks1. While we had anticipated investment returns in the range of 10% to 15%, a number of markets appear to be on track for almost double those gains.
We expected returns to be backed by earnings and a more favorable macro environment and this has largely been borne out. For most of the year, the global economy has been stable and robust, aided in part by the strength of the U.S economy, a measured recovery in European economies, a weaker U.S. dollar and a cautious rate-cutting strategy by the Federal Reserve. But in addition, markets have benefited from support in other areas.
Investor sentiment toward artificial intelligence (AI) increased as the year progressed with the most pronounced impact seen in South Korea, Taiwan and China. In China’s case, it can be traced back to January and the unexpected success of open-source AI platform DeepSeek. In Korea and Taiwan, their respective memory and chip foundry sector dominance in the AI chain was a key driver of market performance.
Another strong tailwind for emerging markets and Asia was the easing of geopolitical tensions. It was a challenging start to the year with the anticipation and subsequent introduction of punitive reciprocal tariffs by the U.S. However, concerns were lifted as agreements with trading partners were reached. China was a key beneficiary of this tailwind. The meeting between China’s leader Xi Jinping and U.S. president Donald Trump in October, and the resulting trade truce, demonstrated strong signs of a pragmatic approach between the two countries that has been welcomed by global markets.
Key Markets: North Asia
The markets of Taiwan and South Korea were supported by the global dominance of their semi-conductor sectors amid the ongoing AI CapEx boom from BigTech hyperscalers in the U.S. South Korea was the top-performer among our markets in 2025, as leading memory chip companies benefited from strong demand in the AI-related High Bandwidth Memory (HBM) market and a cyclical revival began in global heavy industrial sectors such as power and shipbuilding. In addition, the election of President Lee Jae Myung in June brought early political stability and backing for market-friendly reforms such as the ‘value up’ initiative, which aims to improve corporate transparency and enhance access for minority investors in Korea.
Taiwan has also benefited from strong demand for its AI-related chips but it is a market where we have been more cautious. Taiwan’s market is significantly less diversified than Korea’s and valuations, on average, are significantly higher. Domestic-oriented sectors have generally been weak and consumer spending hasn’t improved despite interest rate cuts while the financial sector has also softened.
Japan
The underlying strength in Japan’s market has been strong. Market performance has been supported by an increase in multiples, generally solid earnings and ongoing corporate reforms which continue to incentivize more investors-friendly capital allocation through stock buybacks and dividend increases.
In recent months, the market has been impacted by political change and policy uncertainty following the election of Prime Minister Sanae Takaichi, alongside expectations of an increase in fiscal spending. With interest rates on an upward trajectory under the new administration, financials have performed well.
We have seen some exuberance in the market related to AI themes and with our focus on growth fundamentals we have avoided stocks which have been driven only by price momentum. Instead, we maintained a focus on fundamentals across our three growth categories: linear, cyclical and idiosyncratic. We believe during periods of strong price momentum, it is important to hold stocks that also have earnings momentum, as this provides a more sustainable basis for rerating.
China
China delivered strong returns in 2025 but this performance was largely supported by easing geopolitics and positive sentiment related to AI after the DeepSeek milestone. Gains were concentrated in narrow segments of the market like gaming, internet platforms and financials. Meanwhile, the broader economy and corporate earnings were hindered by weak consumption due to a lack of job creation and wage growth, and a property sector still in the doldrums.
Earnings were also negatively impacted by aggressive competition in markets, particularly in e-commerce, which eroded profit margins. However, there were opportunities to invest in companies with strong earnings profiles, including within e-commerce and consumer discretionary. In financials, insurance companies are benefiting from structural changes as policy measures encourage household savings to move toward pension and investment products rather than property.
More broadly, the government continued to implement incremental but effective stimulus measures. And perhaps more importantly, Chinese leadership publicly expressed support for the private sector, including technology and internet platforms—a significant pivot from a few years ago when regulatory interventions and restrictions left a significant overhang on the market.
India
India was an underperformer in 2025, as economic growth slowed while valuations in many areas remained expensive. We took a measured approach with expectations for weak earnings recovery. At the sector level, financials performed relatively well, supported by interest rate cuts and the anticipation of increased business activity. Autos, e-commerce and quick commerce also performed generally well. In contrast, IT services and consumer sectors underperformed as consumption remained relatively weak.
In reviewing the past 12 months, we believe India has turned a corner. While questions remain around the government’s commitment to infrastructure CapEx programs—historically one of the key drivers of the economy—both the government and the central bank have made aggressive steps to encourage a recovery in consumer spending through rate cuts and tax reductions. We believe these tailwinds could gain greater traction over time. India’s economy is also not characterized by thematic trends such as AI and its economic drivers are primarily domestic.
Southeast Asia and Latin America
The Southeast Asia region was a significant laggard with the exception of Vietnam and Singapore. The region faced headwinds from U.S. tariffs but recovered as bilateral trade agreements were reached. Markets including Thailand, Indonesia and the Philippines were also weighed down by political unrest and border conflicts, which weakened their currencies and, in turn, impacted their interest rates. Malaysia also underperformed which, in part, we attribute to rich valuations.
On the other hand, Singapore performed well. We believe the market is going through a structural reform program similar to Japan and Korea and sectors including financial and telecoms performed well.
Latin America was another region where markets performed well. Brazil and Mexico delivered robust returns, rebounding after underperformance in 2024 because of weak growth and high interest rates. In Brazil, economic growth recovered and investors sought exposure to take advantage of cheap valuations. Some smaller markets, including Chile, also performed well, aided by commodity-related industries.
Outlook
From a macro perspective, a key difference heading into 2026 compared with 2025 is the reduced uncertainty around U.S. tariff policy that dominated sentiment at the beginning of last year. Ongoing negotiations remain, notably with India and Brazil. Tariffs on Brazil seem to be softening while India’s economy is less dependent on exports to the U.S. than some of its peers.
The AI theme will also develop and we expect Taiwan and Korea to continue to benefit from the CapEx of U.S. hyperscalers. China has its own hyperscaler CapEx in motion, albeit earlier in the cycle than the U.S., and we see this as positive for the market longer term. In China generally, a broad earnings recovery needs to take hold over the next couple of years to support a wider rerating of the market in our view. That said, there are numerous companies that are quality businesses and delivering good earnings growth, and for that reason we are positive on the Chinese equity market in 2026.
Markets with robust exposure to global industrial and engineering segments, such as Japan and Korea, are also well positioned for growth in 2026, we think. Korea, particularly, has diversified economic strengths in industrials including shipbuilding and defense. We believe it is strongly positioned, for example, to capture market share in the power sector as grid infrastructures are upgraded to meet AI and renewable energy demand.
A favorable global monetary environment will also be a tailwind for markets, particularly in Latin America; however, the political landscape may be challenging. In Brazil, the outcome of the general election next October remains uncertain given former president Jair Bolsonaro’s public backing of his son Flavio as a presidential candidate rather than Sao Paulo Governor Tarcisio de Freitas, who is seen as a credible challenger to President Luiz Inacio Lula da Silva.
We also expect positive corporate governance reforms to continue to develop and broaden across markets in Asia. One of the weaknesses of Asia markets over the last 10 years has been earnings, and we believe improvements in shareholder accountability and capital efficiency will be key drivers for improving earnings growth and adding value through share buybacks and dividends.
Sean Taylor
Chief Investment Officer
Source: 1 Bloomberg, as of Dec. 12, 2025.
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The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
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