The world of investing is shifting, with emerging and frontier markets (EM/FMs) emerging as beacons of growth and value in a complex global landscape.

These regions are no longer just peripheral players but are now central to strategic portfolio diversification and long-term wealth creation.

As developed markets grapple with high valuations and slower growth, EM/FMs offer a refreshing narrative of resilience and potential, fueled by lower global interest rates and technological advancements.

The Dawn of a New Era for Emerging Markets

Emerging markets are experiencing a renaissance, driven by a confluence of favorable factors.

Global economic trends are aligning to create tailwinds for sustained outperformance, making this an opportune moment for investors to explore these dynamic regions.

The narrative is not just about short-term gains but about a multi-year cycle of growth that could redefine investment strategies.

From AI-driven innovation to fiscal discipline, the foundations are stronger than ever.

Investors are increasingly recognizing the attractive valuation discounts compared to developed markets, sparking renewed interest and inflows.

This shift is backed by improving fundamentals in both debt and equity markets.

2025: A Year of Remarkable Performance

2025 has been a standout year for emerging market equities, with indices reaching heights not seen in years.

The MSCI Emerging Markets Index surged approximately 5.7% year-to-date, reflecting strong quarterly gains and momentum that outpaced many developed counterparts.

This performance is not uniform but highlights regional diversity and opportunity.

Key regional standouts in 2025 include:

• India and Taiwan as top contributors to index gains.
• Latin America outperforming due to economic stability.
• Asia showing dispersion, with Poland up 35% and Thailand down 12%.

EM local currency bonds have outperformed Global Aggregate bonds by over 20% in the past three years, showcasing the strength in fixed income.

EM high yield bonds beat US high yield by a similar margin, while unhedged EM local bonds returned around 20% in USD terms.

This demonstrates the robust risk-adjusted returns available across asset classes.

Looking Ahead to 2026: Drivers and Opportunities

As we move into 2026, emerging markets are poised for continued growth, supported by several key drivers.

Lower global rates and a softer US dollar are expected to fuel capital inflows and currency strength.

The AI capex cycle is sustaining equity rallies, while easing geopolitical risks, except in areas like Venezuela, improve sentiment.

Growth projections are optimistic, with the IMF forecasting MENA at 3.7% and upside in several key economies.

Notable growth opportunities for 2026 include:

• China, India, and Indonesia for consumption and investment.
• Mexico, Brazil, and South Africa for fiscal improvements.
• Frontier markets offering untapped potential.

Technicals and flows are also favorable, with EM funds now comprising 5.2% of global equity AUM, up from 4.9% at end-2024.

Inflows to EM debt ex-China reached $8.3 billion year-to-date in 2025, reversing previous outflows.

Passive funds drew €11.6 billion over nine months, signaling a broader rebalancing towards emerging markets.

EM currencies have gained 6% against the DXY year-to-date, with lower volatility enhancing appeal.

Valuation Insights: The Compelling Case for Investment

Valuation metrics underscore the investment case for EM/FMs, trading at levels that offer significant upside.

Post-2025 gains have not erased the compelling discounts relative to developed markets.

For instance, the PEG ratio for EMs is 0.9x, compared to 1.5x for the US and 1.3x for Europe.

Forward P/E ratios show MSCI EM at 13.3x versus the S&P 500 at 22.4x, highlighting the value proposition.

Earnings growth is robust, with MSCI EM EPS up 13.5% year-to-date and forward estimates suggesting an 18% increase over the next 12 months.

To illustrate key valuation differences, consider the following table:

This table emphasizes the structural advantages in fiscal health and growth potential.

Spotlight on Top-Performing Funds

Several EM funds have consistently delivered top-quartile returns, employing strategies like value and SmartGARP to outperform.

These funds leverage strategic stock selection and regional focus to capitalize on market inefficiencies.

Notable performers include Macquarie Emerging Markets, which overweights South Korea and has shown resilience despite past losses.

Artemis SmartGARP Global EM Equity focuses on growth at reasonable prices, beating benchmarks annually post-launch.

Robeco Emerging Stars Equities, with assets of £2.5 billion, achieved a 158.9% return over 10 years through a blend of top-down and bottom-up analysis.

Key strategies adopted by top funds:

• Value investing in undervalued regions.
• Growth at reasonable price (GARP) approaches.
• Focus on business models and healthy fundamentals.
• Emphasis on sustainable and income-oriented equities.

Other standout funds include Invesco Global EM (UK), Lazard EM, and VanEck EM Fund, each with unique approaches to navigating market volatility and opportunities.

For instance, the VanEck EM Fund posted a 13.79% return quarter-to-date as of June 30, 2025, driven by strong allocations to Brazil and India.

Navigating the Challenges: Risks to Consider

While the outlook is positive, investing in emerging markets comes with inherent risks that require careful management.

Political instability and weaker institutions can lead to volatile currencies and lower liquidity.

Governance issues and credit spread tightness add layers of complexity, as seen in the 2022 losses for some funds.

Key risks to monitor include:

• China allocation risks due to economic shifts.
• Union resistance in fiscal reforms, such as in Argentina.
• Geopolitical tensions affecting trade and investment flows.

However, these challenges are often priced into valuations, creating opportunities for discerning investors.

Strategies like diversification and active management can help mitigate these risks.

For example, the rise of intra-EM trade, spurred by trade wars, offers alternative growth avenues.

US policy shifts weakening the dollar also benefit EM currencies, providing a natural hedge.

Practical Insights for Investors

To capitalize on EM/FM opportunities, investors should adopt a balanced and informed approach.

Start by assessing personal risk tolerance and investment goals before allocating funds.

Consider using a mix of passive and active funds to gain exposure while managing costs.

Practical steps to take include:

• Researching fund strategies and historical performance.
• Monitoring macroeconomic indicators and policy changes.
• Diversifying across regions and asset classes within EMs.

Focus on funds with proven track records and transparent methodologies to navigate the complexities.

For instance, dividend strategies in EMs have outperformed long-term, offering income and growth potential.

High-yield bonds thrive in lower rate environments, enhancing fixed income portfolios.

Visual tools, like charts comparing EM indices to global benchmarks, can aid in decision-making.

As 2025 sets the stage, 2026 is likely to see continued momentum and investor rebalancing towards these vibrant markets.

Embrace the journey with a long-term perspective, and let the growth stories of emerging markets inspire your portfolio's future.