A fresh look at EM equities

This Asset Allocation Focus takes a fresh look at emerging market (EM) equities. Section 1 sets the stage, by briefly reviewing their performance over the past decade. Sections 2, 3 & 4 explore their exposure to three key themes: section 2 examines the implications of the ongoing AI revolution; section 3 weighs up the fall-out from greater global fracturing; and section 4 considers the consequences of changes in commodity prices brought about by the green transition. Section 5 discusses the broader outlook for earnings. Section 6 turns to valuations. We put their current levels into context; ponder how they might evolve; and contemplate the implications for returns. Section 7 concludes with our projections: we anticipate that, in US dollar terms, MSCI’s Emerging Market Index will broadly continue to keep up with its World ex USA Index through the end of 2025, but that both will continue to lag its USA Index in the process. Within the Emerging Market Index, we envisage Asia outperforming both EMEA and Latin America. We then expect to see some of the outperformance of MSCI’s USA Index unwind in 2026, as the bubble in AI bursts.