Emerging Market Equity: Outlook 2026
December 2025 | Ygal Sebban
After years of underperformance, emerging markets (EM) are entering a new era of opportunity. One question investors will ask in 2026 is whether EM equity outperformance can continue. Our answer: this is just the start. Secular drivers, cyclical tailwinds and powerful thematic catalysts converge to make EM one of the most compelling investment stories for the year ahead.
2025 marked the beginning of EM’s resurgence – but it was just the start.
The Stars are aligned
- Demographics
Population growth, urbanisation and a rising middle class, particularly in India and Southeast Asia, are reshaping consumption patterns. Increased female workforce participation and rising GDP per capita are driving domestic expenditure growth in goods but increasingly in consumption of services. - Government-led reform and index evolution
Structural reforms in India and China, including pension initiatives, are accelerating domestic demand. Meanwhile, the MSCI EM Index has shifted from industrials and energy towards technology and consumer discretionary, with India, China, Korea and Taiwan accounting together for 75.7% of the index. - Credit quality
Eight of the ten largest EM sovereigns are now investment-grade. Positive carry yields enhance returns, making EM fixed-income and FX strategies attractive alongside equities. - Cyclical tailwinds
The US faces structural challenges with the markets questioning the sustainability of the public debt, the housing market stress and the slowing growth of the domestic economy not related to AI. These pressures will likely force the Federal Reserve into aggressive rate cuts, pushing real interest rates into negative territory. Historically, such environments have triggered US dollar weakness and EM outperformance. Lower interest rates in both the US and many EM countries should further underpin EM equity performance. - Positive view on China
China’s ability and willingness to support growth remain intact, even amid real estate headwinds and potential new tariffs. Coordinated policy across monetary, fiscal, property and supporting equity markets has been unprecedented, positioning domestic equities as a pillar of the growth strategy. This is further supported by a multi-year anti-involution drive across a broad range of sectors to tackle China’s ongoing deflationary pressures. - The AI tailwind
The AI revolution is a CapEx story. Global investment in AI infrastructure is expected to approach USD 1 trillion by 2030, with much of that spend directed toward semiconductors. EMs are the main suppliers and the semiconductor industry is facing supply constraints which should bode well for further price increasing: TSMC, Samsung and Hynix dominate chip production.
A changing global context
Higher-than-expected US tariffs are likely to weigh on international trade and slow developed market (DM) growth, reinforcing EM’s role as a resilient anchor in an evolving global order. In a world of dollar debasement and geopolitical shifts, EM offers stronger macroeconomic growth and less stretched sovereign finances. Valuations remain compelling: EM equities trade at a forward P/E of just 14x for 2026, historically cheap and under-owned. After years of outflows, investor interest is returning, creating scope for multiple expansion.
MSCI Emerging Markets Index forward price/book – Premium/discount to S&P 500 Index
Source: GAM, Bloomberg as at 30 September 2025. Past performance is not an indicator of future performance and current or future trends. Indices cannot be purchased directly. Please see “Disclaimer” at the end of this material for important disclosures regarding the information contained herein. Indices cannot be purchased directly.
The case for re-rating
Over the past two decades, EMs have undergone a profound transformation. Sector composition has shifted dramatically: what was once dominated by industrials, materials and energy now mirrors developed markets, with technology, finance and consumer discretionary taking centre stage accounting together for 62% vs only 54% for the MSCI World). Today, the 27% weight of the tech sector is similar to that of MSCI World, reflecting the rise of high-value industries. Leading global players in semiconductors, memory and battery technology are now based in Asia – Taiwan, Korea and beyond – placing EM at the heart of structural growth themes such as AI and energy transition.
This evolution underscores a critical point: EMs are no longer the cyclical, commodity-driven story of the past. They are stronger, more diversified and increasingly investment-grade. In a world where global growth is scarce, countries that can deliver sustainable growth should command a premium—not a discount. The persistent valuation gap between EM and developed markets is therefore unjustified and, in our view, should narrow significantly. Fundamentals now rival those of developed markets while offering superior growth prospects, creating a compelling case for re-rating EM valuations.
2025 marked the beginning of EM’s resurgence, but it was just the start. With secular strength, cyclical support and thematic tailwinds, we think EM stands out as one of the most compelling opportunities for 2026.
Ygal Sebban is an Investment Director investing in Emerging Markets Equity strategies at GAM Investments.