Emerging markets come in and out of favour and this year they are back with a boom: 2025 has been a ‘stellar year’ for emerging markets so far, with China and Latin America topping performance tables in September.
Part of this revival has been linked to US president Donald Trump’s trade and fiscal policies, which some managers argue have inadvertently made emerging markets great again.
Yet despite the strong returns, many investors remain underweight or entirely absent from the sector. Emerging markets are still perceived as too risky or too remote to warrant a meaningful allocation.
To test that assumption, Trustnet asked three experts – QuotedData senior analyst Matthew Read, Killik associate portfolio director Andrius Makin and Fidelity International investment director Tom Stevenson – when it makes sense to add emerging markets to a portfolio and how much exposure is appropriate.
Tomorrow, we will examine the practical question of how best to invest.
Why should investors consider investing in emerging markets?
The main reason investors turn to emerging markets is the potential for faster economic growth than in developed economies.
Read explained: “Emerging markets tend to benefit from favourable demographics, growing middle classes and growth in areas such as technology and financial services – they are benefiting from increased digitalisation as mobile phones’ penetration increases and, without the burden of legacy systems seen in more developed markets, it is easier to play catch up by leapfrogging older technologies.”
Makin agreed, noting that this shift will increasingly change the balance of global consumption, with an increasing share of the global middle class based in these countries.
He pointed to the International Monetary Fund’s forecasts showing that emerging markets are expected to be among the fastest-growing economies to 2030, even after adjusting for US tariffs.
But growth is not the only factor at play. Around 85% of the world’s population live in emerging markets but they represent less than half of the global stock market value, Read noted.
This means there are “literally billions of consumers that are under-represented in investment portfolios and these are high growth markets too”-
Emerging markets also tend to be less correlated with developed markets, meaning that they don’t rise and fall at the same time, delivering diversification benefits.
So why now?
Stevenson argued the current environment strengthens the case for emerging markets further, with investors looking to rebalance portfolios away from the US.
“Emerging markets are gaining attention after a period in which other developed markets such as Europe and Japan were the principal beneficiaries,” he said.
The weaker dollar is also usually a positive for emerging markets, boosting their buying power, lowering imported inflation and easing the burden of dollar-denominated debt. A weak dollar also boosts commodity prices, which helps many emerging markets, especially Latin America.
Finally, many emerging markets have a relatively low exposure to tariffs, Stevenson argued.
“Even China, which has the biggest exposure, enjoys a largely domestically-exposed stock market. Increasing technological innovation means there are often limited alternatives to Chinese products despite higher costs as a result of tariffs.”
Part of the reason for investors moving away from the expensive US market is that emerging markets are significantly cheaper (30%-50%) than developed markets.
Makin argued that even after pricing in political and geopolitical risks, this is still “a compelling entry point for long-term investors”.
Stevenson calculated that emerging markets are trading at a near 45% discount to the global index in terms of price-to-book value despite offering a return on equity just 13% lower than the benchmark.
Lastly, one big knock on the asset class has been the lower standards of corporate governance, but Makin noted this is improving.
“There has been an increasing focus in emerging markets on corporate governance and shareholder rights as their capital markets continue to mature. Assuming this trend continues, this should help drive more foreign inflows into emerging markets and support higher share prices.”
Pitfalls to be aware of before investing
While emerging markets have a lot going for them, there are still negatives. Read cautioned investors should expect greater volatility, currency swings and political uncertainty than in developed markets.
However, if risk is understood as the permanent capital loss rather than higher volatility, emerging markets “are not necessarily riskier”.
“We think investors should be aware of this distinction,” he said.
Another challenge is liquidity. As some markets are less developed, shares can be harder to buy and sell quickly.
All three experts agreed that this makes closed-ended structures, such as investment trusts, a better option as they allow managers to focus on long-term opportunities without worrying about redemptions.
How much should investors have in emerging markets?
The answer is that it depends on risk tolerance and when investors will need the money back. For cautious investors who prioritise stability, they should have a low allocation to the asset class due to its higher volatility, said Read, who noted that “many will exclude it altogether”.
Makin would have up to 2.5% in cautious portfolios, but Stevenson was keener, suggesting as much as 10% could be appropriate for even the most risk-averse.
Balanced portfolios (typically viewed as 60% equities and 40% bonds) can have up to 5% in emerging markets, said Makin, while Read saw a range of 5% to 10% sensible.
This reflects their broader presence in global indices, with the asset class making up around 10% of the MSCI ACWI.
He said: “This level adds some diversification and boosts growth within the portfolio, but volatility is still contained.”
For those able to put money away for a decade or more (the prerequisite to be an adventurous investor), between 7.5% and 20% in emerging markets is appropriate, according to the experts.
Makin was at the lower end (7.5%), while Read expected to see allocations between 10% to 20% in order to “capture the benefits of higher long-term growth in exchange for a bit more volatility”.
Even in a more adventurous portfolio, an allocation above 20% is “likely to introduce more volatility than investors may be comfortable with”, warned Stevenson.