Emerging Markets (EM) have carried their momentum from 2025 into 2026, underpinned by signs of a turning point in profitability, supportive macro themes, reasonable valuations, and broadening investor participation.

For much of the past 15 years, lackluster earnings growth has been a challenge for EM equities.

Despite faster economic growth than developed markets, EM companies have struggled to deliver superior growth in profits and shareholder returns. In addition to the weaker conversion of economic growth into corporate profitability, frequent equity issuances have reduced per-share earnings over time. This contrasts with developed markets, where more widespread share buyback activity generally helped support per-share earnings.

Recently signs of improvement have appeared.

The MSCI Emerging Markets Index generating annualized returns of 35.6% through April 2026 versus 17.3% for the MSCI World Index.

This performance uplift has been accompanied by a stabilization in relative earnings trends rather than sentiment alone.

Relative profit growth appears to have bottomed in Q4 2024 and continues to improve.

After outpacing developed market earnings growth in 2024 and 2025, EM earnings are expected to maintain that lead through 2026 and 2027.

Despite more upbeat profit trends and the rally over the past 18 months, EM valuations remain relatively favourable.

The MSCI Emerging Markets Index trades at 11.7x forward earnings, below both the 10-year average of 12.2x and the 20-year average of 11.7x. Relative valuations appear even more compelling. EM equities continue to trade at an exceptionally deep discount of nearly 40% relative to developed markets.

While some of this discount arguably says more about elevated developed market valuations, particularly in U.S. equities, it may also signal that global investor positioning toward EM remains light after a long stretch of subdued relative performance.

Periods when earnings growth improves while valuations remain discounted can create favourable conditions for better performance. If EM profitability continues to strengthen and investor confidence improves, the current sizeable valuation gap will likely narrow over time.

Some of the skepticism toward EM assets can be traced back to concerns about macroeconomic instability. These risks will likely linger, but it is worth noting that many EM countries have made considerable progress bolstering economic resilience with policy reforms.

Central banks’ credibility has improved, reliance on foreign-currency debt has declined, and corporate governance initiatives have accelerated and become more shareholder-oriented across many EM countries.

These structural improvements may help explain why EM equity volatility has moderated in recent years.

Between 1988 and 2020, the rolling 12-month price return volatility for the MSCI Emerging Markets Index averaged 20.8%, compared with 13.7% for developed markets.

Since 2020, however, EM volatility has averaged 16.5%, much closer to the 15.9% average for developed markets. A better setup ahead

Over time, equity markets tend to follow the direction of earnings.

Given EM cycles have historically unfolded over multiyear horizons, the recent inflection in relative profit trends warrants monitoring as it may represent the early stages of a more durable shift in trend.

Currency dynamics may also become increasingly supportive if the U.S. dollar transitions into a weaker phase after an extended period of strength.

Historically, weaker U.S. dollar environments have tended to coincide with improved performance for EM assets. Meanwhile, EM equities could also benefit from renewed portfolio reallocation flows seeking diversification and growth at less-expensive valuations.

Tech-related sectors now account for a larger share of the MSCI Emerging Markets Index, providing investors with alternative ways to participate in the global AI ecosystem beyond the dominant U.S. market. 2026

In summary, improving corporate fundamentals, stronger macro conditions, reasonable valuations, make for a compelling argument for exposure in this sector.

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