- Emerging markets outperformed developed markets and the US in 2025 for the first time since 2017

- Valuations remain compelling, with emerging markets trading at an approximate 40% discount to the rest of the world despite last year’s rally

- Supportive fiscal and monetary dynamics provide a constructive macro backdrop

- Emerging markets sit at the heart of the global AI supply chain, offering exposure to structural growth themes at attractive valuations relative to US peers

Emerging market (EM) equities have re-emerged as a standout area of global equity markets, outperforming developed markets (DM) and the US in 2025 for the first time since 2017.

Fidelity International’s Emerging Market team outlines why the asset class remains well positioned to continue its streak of outperformance into 2026, supported by attractive valuations, improving macroeconomic fundamentals, and powerful structural growth drivers.

Chris Tennant, Emerging Markets Portfolio Manager at Fidelity International, comments: “EM was among the best performing equity markets in 2025, outperforming the US for the first time since 2017, because of that, it’s easy to forget that the market continues to trade at a deep discount to the US and the rest of the world (see chart 1).

“Up until the end of 2024, weakness in China, and an environment of structurally higher interest rates and a strong USD had driven a de-rating in the market, leading to several decades of underperformance vs DMs. “However, 2025 saw several of these factors beginning to shift, with a weaker dollar, falling interest rates, momentum in certain key commodities such as copper and gold, and signs of recovery in parts of the Chinese market supporting the asset class. Also supportive was the presence of a growing base of investors starting to look beyond the US for alternatives. “And with the asset class still trading at a ~40% discount versus the rest of the world, there could be scope for continued re-rating in the market this year.”

EM trades at a ~40% discount versus the rest of the world

Source: Fidelity International, Bloomberg, 31 December 2025.

A robust fiscal and monetary policy backdrop

“The fiscal backdrop continues to look supportive across much of the universe relative to the developed world. This in part reflects a hangover from Covid-19, when many DMs handed out fiscal stimulus packages to support the consumer, whilst we saw the opposite in many EMs, especially China, which tightened its belt and sought to deflate the property market.

“As a result, several EM countries now have greater fiscal headroom and flexibility to support growth if required.

The fiscal backdrop looks superior in EM vs. DM

Source: LHS: Fidelity International, LSEG Datastream, IMF Fiscal Monitor, as of October 2024

“In addition, the fiscal backdrop in the US has weighed on sentiment towards assets such as the US dollar, putting downward pressure on the currency, which pulled back significantly in 2025. Should the dollar continue to weaken or even remain flat, this would prove supportive for EM, given a weaker dollar reduces debt servicing costs and imported inflation for EM and supports commodity prices, boosting local currencies and strengthening consumer purchasing power.

“However, it is worth noting that although US dollar weakness remains a tailwind for the asset class, it is not the only driver for EM outperformance. Many EM economies benefit from increasingly sophisticated capital markets and therefore carry less dollar-denominated debt than in the past, meaning EM outperformance is not reliant on continued USD weakness.

“The monetary policy environment is also constructive. Many EMs raised rates early in 2021-22 to combat inflation, and real rates remain high, most notably in Brazil, but also in several EMEA markets too. As a result, many of these EMs have a long runway to further ease policy should the Fed continue to cut rates, which should create a supportive environment for equity valuations.”

Strong earnings growth forecasts driven by tech and commodity-centric markets

“Consensus estimates expect EM earnings growth to accelerate to 18.2% in 2026, a notable premium versus DMs and the US, which looks especially attractive considering EM’s valuation discount. Although the drivers of these earnings estimates are broad-based, as the country breakdown below shows, a key contributor is tech heavy markets such as Taiwan and Korea, and commodity-driven economies such as South Africa.”

Source: JP Morgan, IBES estimates, as of 8 January 2025

EM: The heart of the AI supply chain

“Another factor driving US markets higher in recent years has, of course, been optimism around AI. What has been overlooked, however, is the fact that the majority of the AI supply chain is located in EM markets like Taiwan, and to a lesser extent Korea.

“It is likely that much of the value accrual from AI and datacentres will go to EM companies, and we see significant opportunity to gain exposure to these tech companies vital to the AI supply chain that often offer superior revenue growth to many US tech companies at much cheaper multiples.”

Commodity tailwinds

“Another key driver for the EM asset class is the increasingly ‘goldilocks’ type backdrop for commodity prices, with what could be continued strength in key mined commodities such as copper and gold met with a muted backdrop for oil prices.

“The backdrop for copper looks particularly favourable. Here, structurally stronger demand for the metal, driven by EVs, growing datacentre use and electrification, is coupled with falling supply, due to a lack of new greenfield projects and declining mine quality. For gold, whilst the market has moved a long way and price moves are much less easy to forecast than for a commodity like copper, it appears that many of the positive drivers for the precious metal remain intact, given the continued tailwind from central banks looking to diversify away from US Treasuries, with gold remaining a low proportion of total reserves in markets like China.

Bright spots in China: industrial innovators

“Finally, China warrants separate consideration given its considerable weight in the EM index. While the outlook for the consumer remains challenged, there are some bright spots in the market, particularly within several emerging industrial sectors, where we are seeing rapid innovation among Chinese companies.

“There are several key areas where China is moving up the value chain, including some of the world’s emerging and fastest growing export segments, such as batteries, semi components, and robots. Here, growing levels of R&D spend, combined with a large, skilled talent pool - with China having the world’s highest proportion of tertiary graduates in a STEM field2 - are driving innovation and market share gains.

An opportune moment for EM equities

“The dispersion on offer within EM also creates a particularly constructive environment for stock picking. We have seen a huge bifurcation in valuations at the country level, with the cheapest markets such as South Africa, Brazil and Mexico de-rating, whilst the most expensive, including India and Taiwan, have become more expensive. This offers considerable valuation opportunities among the broader index. Significant divergence in country-level returns, uneven corporate governance standards, and heightened sensitivity to headlines also mean there are plenty of segments of the market to avoid, pointing to the need for selectivity.”