Why emerging markets - and why now?

Emerging markets (EM) have come into focus as the global investment landscape shifts. Long-standing assumptions, such as the strength of the US dollar and the reliability of US growth, are being challenged by persistent uncertainty, trade fragmentation, and changing central bank priorities. In this environment, tailwinds from easing inflation, stronger balance sheets, and a softer US dollar are helping EM enter a period of strength.

In addition to the strategic investment case, emerging markets are also where change tends to happen fast. They’re home to rising populations, growing cities, and dynamic economies. This combination of strong performance potential and the opportunity to support global progress makes EM especially meaningful for impact investors.

What are emerging markets?

Emerging markets refer to countries that are in the process of becoming more developed. They’re often characterised by:

• Fast-growing economies, often outpacing growth in developed countries, driven by industrialisation, urbanisation and policy reforms.
• Expanding middle class and urban populations, which increase demand for goods and services and drive further economic development.
• Market volatility, with higher risks of political instability, currency fluctuations, and less mature regulatory environments.
• Lower income levels compared to developed countries, but with a trend toward rising per capita income as their economies grow.

An interesting example of an emerging market is China, the world’s second-largest economy. 1 Despite its size, China’s markets remain less mature, with tighter government control and more volatility than those of developed countries. For this reason, many analysts still classify it as an emerging market.

The value and growth combination

As of June 2025, emerging market stocks are trading at a 42% discount compared to shares in the S&P 500 index, a benchmark for the US stock market. 2 That’s significantly wider than the historical average discount of 25%. 3

This means, even after recent growth, emerging market companies are still relatively undervalued. And while EM stocks remain cheaper than their developed market counterparts, there could be room for further returns.

The EM story isn’t just about value; growth is also a large factor. Beyond their attractive price, over the next two years, emerging market companies are expected to grow their earnings faster than their developed market peers — by 17% 4 compared to around 14% growth in the US 5 and 12% in the European Union. 6

A place where capital drives impact

Alongside investment potential, emerging markets offer the chance to directly support some of the world’s most pressing needs.

In 2024, the value of green, social and sustainability (GSS) linked bonds issued by EM countries passed the $1 trillion mark. 7 These are investments where the money is used for projects like renewable energy, clean water, affordable housing, and better access to healthcare. Emerging markets now represent around a quarter of the global GSS bond market. 8

Every $1 invested in health in emerging markets generates $4 of economic benefit, compared to $2 in developed countries. And efforts in areas like poverty reduction can have up to 10 times the impact in emerging markets compared to wealthier nations. 9

Why now? Emerging markets in focus

For many years, EM stocks have been priced lower than those in more developed economies. This reflects a mix of factors, from economic uncertainty to political risk. But right now, that gap has widened even further, creating a potentially attractive entry point for investors.

We see a combination of forces that could be causing this. Emerging markets are showing signs of renewed momentum, with EM company earnings expected to grow more quickly than in developed markets over the next two years. 10 At the same time, many global investors still have relatively low exposure to these markets, suggesting room for change.

A weaker US dollar is also helping. Historically, when the dollar falls, emerging markets tend to benefit. That’s because their debt becomes less expensive, trade becomes more competitive, and investment flows more freely.

Emerging markets are also helped by ongoing innovation. For example, advances in semiconductor technologies are driving significant improvements in energy efficiency across electric mobility, industrial automation, and digital infrastructure. Regulatory changes, like the global momentum for net-zero commitments, underpin the need to focus on emerging markets from both an investment and impact perspective.

Impact in emerging markets

Emerging markets are where many of the world’s biggest development needs and opportunities converge.

Meeting the UN’s Sustainable Development Goals (SDGs) in emerging markets by 2030 will require an estimated $3.7–$3.9 trillion in additional annual investment, particularly in areas like clean water, sanitation, healthcare, and infrastructure. 11

Take water, for example – one of the most fundamental needs. As of 2023, 2.2 billion people (1 in 4) still lack access to safe drinking water. 12 3.5 billion—nearly half the world’s population—live without safely managed sanitation. 13

The impact of water scarcity extends beyond health; it affects gender equality too. Around 1.8 billion people collect water from outside the home, and in 70% of households, women are responsible for this task. 14 This daily burden reduces opportunities for education, work, and community participation.

By directing capital into emerging markets, particularly into essential services like clean water and sanitation, investors can help unlock health, education, and economic opportunity while also supporting long-term, sustainable growth.

In summary: the investment case for EM

Adding emerging market investments to a portfolio can help bring an added layer of diversification. That’s because they don’t always move in the same direction as developed markets. A key example of this is when the US dollar weakens. Emerging markets often benefit – their exports become more competitive, debt burdens ease, and international capital flows more freely.

But the case for emerging markets isn’t just about currencies or comparisons with the US. The drivers of growth here look quite different. Rapid urbanisation, the rise of a growing middle class, and major infrastructure investment are reshaping economies and creating long-term opportunities.

While headlines in developed markets may focus on artificial intelligence or interest rates, emerging markets are being powered by forces that are broader and deeply human — new cities, new consumers, and new infrastructure. Together, these shifts point to lasting growth and fresh possibilities for impact.