Five reasons we are positive on EM equities

Emerging markets, once seen as volatile, are now demonstrating strong fundamentals and macro discipline—offering not just diversification, but real opportunity, says Ygal Sebban, Investment Director, Emerging Markets Equities.

18 August 2025

Emerging markets (EMs) have long been perceived as vulnerable to country-specific risks. Today, however, I believe they are demonstrating stronger macroeconomic discipline and greater resilience, especially as developed markets (DMs) face mounting fiscal pressures and slowing growth. EMs are projected to contribute approximately 65% of global economic growth by 2035, with nine key EMs expected to rank among the world’s 20 largest economies¹. Their fiscal health is notably stronger, with average government debt-to-GDP ratios just above 60%, compared to over 100% in DMs.² This shift highlights the growing appeal of EM.

Following this year’s strong performance, my outlook remains unchanged: I continue to be optimistic and bullish on EM equities.

Chart 1: MSCI EM price-to-earnings (PE) ratio discount to US equities

EMs are rebounding after years of underperformance. Over the past decade, EM equities have lagged developed markets (DMs) by more than 50%³, but 2025 marks the beginning of a catch-up phase, both in performance and valuation. EM equities continue to trade at historically low levels, offering a compelling entry point compared to DMs, which remain richly valued.

Historically, EM valuation discounts have reflected slower growth expectations. Today, however, EMs are showing stronger growth momentum than DMs, yet this is not reflected in their pricing. The disconnect suggests significant upside potential, as current valuations fail to capture EMs’ improving fundamentals.

While EMs are diverse, most markets trade at deep discounts relative to their own history and global peers. India is the exception, with valuations slightly elevated versus its historical average—but not excessively stretched. Meanwhile, US equities continue to command a substantial premium, both relative to EMs and their own historical norms.

China remains a key driver of EM momentum, with GDP growth targeted at 5% in 2025.⁴ The first half of the year delivered strong performance, supported by robust exports—some front-loaded ahead of anticipated trade shifts. More importantly, growth is being actively stimulated through accommodative monetary and fiscal policy. Credit activity is picking up, and interest rates remain low, encouraging capital flows into equities and supporting broader expansion. While global trade risks persist, particularly around tariffs, the outlook is more balanced than feared. Trade tensions between the US and China also appear to be stabilising.

This backdrop reinforces the appeal of domestic and idiosyncratic themes within EM, in my view. A particularly supportive catalyst is the US Federal Reserve’s (Fed’s) rate-cutting cycle, which adds further momentum to EM assets. Taken together, these factors strengthen the case for continued optimism in EM.

Chart 2: MSCI EM vs DM, Fed funds and cut cycle

Historically, EM equities have tended to outperform developed markets during Fed rate-cutting cycles. While there are exceptions, such as the Asian financial crisis and the Covid period marked by aggressive quantitative easing, the trend has generally held. With the Fed expected to begin cutting rates in September 2025, this cycle could once again act as a catalyst for EM outperformance. Lower US rates ease global financial conditions, giving EM central banks more flexibility to reduce their own rates. In fact, 17 out of 19 EM countries are already seeing rate cuts, which supports domestic growth and equity market performance.

This environment is particularly favourable for domestic and idiosyncratic EM stories, as lower rates stimulate credit, investment and consumer demand. Combined with improving fundamentals and attractive valuations, the Fed’s easing cycle adds another layer of support to the bullish case for EM.

Chart 3: EM relative performance and USD in the long term

The expected weakening of the US dollar is another key catalyst for EMs. Historically, EM equities have shown a strong inverse correlation with the dollar, and with the Fed likely to begin cutting rates, downward pressure on the USD is set to continue. This trend is driven not only by monetary policy but also by concerns over the sustainability of US fiscal deficits, currently running at nearly USD 2 trillion annually, with almost USD 7 trillion in spending against about USD 5 trillion in revenue.⁵

A weaker dollar supports EM performance in several ways: it boosts trade competitiveness, attracts capital flows and strengthens EM currencies. Many EM countries also offer high real interest rates, further supporting the attractiveness of their currencies.

Valuations remain compelling. EM equities trade at a significant discount to US counterparts, even when adjusting for sector composition. Combined with stronger growth prospects, particularly in China, and supportive rate cycles, the macro backdrop could lead to EM outperformance.

In short, dollar weakness, attractive valuations and resilient fundamentals reinforce the long-term investment case for EM.

After outflows for the year falling to USD 83 billion in 2024 from USD 132 billion in 2023⁶, EM equities are beginning to see renewed investor interest. In recent months, approximately USD 31 billion has returned to EM equities, marking a potential turning point. This rebound comes as EM allocations remain significantly underweight in global portfolios, suggesting ample room for further inflows. This creates what many refer to as a “pain trade”; investors who missed the rally are now under pressure to re-enter as EMs continue to outperform. The setup is compelling, EM equities are attractively valued after years of lagging, interest rates are falling across both EMs and the US, and EM growth is outpacing that of DM.

Importantly, these fundamentals are not yet fully reflected in valuations. Combined with continued stimulus from China and a supportive macro backdrop, the case for EMs remains strong. EM are cheap, under-owned, and well-positioned for further upside.

A few words on tariffs

Despite headline concerns, the actual impact of tariffs on China’s equity market is minimal. Only around 3% of MSCI China earnings are tied to the US, and companies with high US exposure, such as PDD Holdings , are typically avoided. For major exporters like Taiwan and Korea, the outlook is more constructive. Taiwan has secured favourable terms with the US, including broad exemptions for semiconductor firms, and recent developments allow Nvidia to resume exports of advanced chips to China, highlighting the mutual interest in maintaining tech trade flows.

We remain cautious on countries more exposed to tariff risks, such as Mexico and smaller Asian exporters like Vietnam, Thailand, Philippines and Indonesia. Tariffs in these regions range from 19% to 30%, and complex supply chains, such as Chinese firms re-exporting via Vietnam, face higher scrutiny. This uncertainty limits the appeal of broad export plays, except in semiconductors and artificial intelligence (AI).

While tariffs may weigh on global growth, second-order effects are mitigated by China’s domestic stimulus and falling interest rates across EMs. These factors support domestic demand and reinforce the case for focusing on internally-driven EM stories.

A strong case for EMs

EMs are entering a new phase of opportunity, in my view. With improving macro fundamentals, attractive valuations, supportive policy cycles and renewed investor interest, EMs are well-positioned to outperform. As DMs face rising fiscal and political pressures, the resilience and dynamism of EMs stand out. For investors seeking growth, diversification and long-term value, EM offer a compelling proposition, driven by domestic demand, innovation and structural reform.

Ygal Sebban leads the Emerging Markets Equity team and manages the Emerging Markets Equity strategy at GAM Investments.