Emerging markets – the next generation…

A generation ago, many emerging markets would have been considered either low income or minor economies. That is no longer the case. China, South Korea and Taiwan are the three largest economies in the MSCI Emerging Markets index. China is the world’s second largest economy, at almost five times the size of Germany. South Korea and Taiwan are ranked the 14th and 22nd largest economies respectively, above Belgium, Ireland and Austria.

Emerging markets as a term also covers countries from Europe, Latin America, the Middle East and Africa. Many of these have the potential for higher growth compared with developed markets. On the downside, they can be more volatile, while carrying greater political, currency and governance risks.    

Many emerging markets today look attractively priced in comparison to developed markets. They can also offer diversification benefits such as exposure to some technologies and innovations rarely matched in the West. Emerging markets typically have more attractive demographics (i.e. younger for longer workforces) likely to underpin superior economic growth.

A shift in investor sentiment

Over much of the past decade, investors would have seen higher returns from investing in developed rather than emerging markets. The latter had to battle headwinds, including a strong dollar, weak commodity prices (many emerging markets are commodity exporters) and country-specific concerns. China, for example, has endured an extended period when slower growth, regulatory crackdowns and a severe correction in the property sector weighed on sentiment. Yet  many of these obstacles  are fading. At the same time, many investors are now calling time on extended valuations in developed markets, particularly for US tech firms.

What’s changing about emerging markets?

As a new asset class in the late 1980s, emerging markets reflected a mix of low-end manufacturing and commodity miners, together with infrastructure or consumer focused companies. As these markets benefited from substantial capital inflows, investors enjoyed extended periods of outperformance compared to developed markets.

Today it is a different picture. Emerging markets are now more powerful economies, and better able to weather external shocks. They make up close  half of the global economy (GDP). They are projected to account for the majority of global economic growth over the next couple of years too¹. Meanwhile, structural reforms, particularly in finance and regulation, are better able to support these markets at times of stress.      

A demographic dividend

Birth rates and fertility levels areas across much of the world have continued to fall, and the global population is forecast to peak at a lower level than previously expected.  It is now predicted to reach just over 10 billion by the 2080s before beginning to decline².

Fewer workers making things will likely lead to lower economic growth, even accounting for more widespread use of technology. At the same time, the post WW2 baby boomer generation is pushing up the proportion of those retired versus those still working.  Higher life expectancy in the West means these governments will face further pressure on pensions and healthcare funding.

The wealth trickle down

Economic wealth across emerging markets is typically concentrated in relatively small segments of the population. The trickle-down effects as this spreads is attractive. These include growing job creation and domestic consumption. ; A higher government tax take can then be directed into education, health and infrastructure. There is more overseas interest via foreign direct investment; and finally the brain drain is slowed as graduates and professionals no longer feel they need to emigrate to fulfil their potential.

These outcomes are highly visible in China and India. This explains in large part why these two economies are forecast over the next few years to grow at annual rates of 5%-6%, ahead of the G7 developed countries³.

Other emerging markets which look set to rank among the world’s largest economies by the middle of the next decade are Indonesia, Brazil and Saudi Arabia⁴. Between them, these countries are rich in a range of essential commodities, both hard  oil, gas and metals - as well as soft, such as wheat, soya beans and sugar.  

The mighty dollar

Periods of emerging market underperformance have coincided with a strong US dollar. Businesses in emerging markets need to import raw materials priced in dollars. This means that they pay more for these goods when the US dollar exchange rate is high, but less when the rate is lower. A lower valued US dollar also helps countries paying down dollar-denominated debts.

Over the past few years, the US economy has outperformed market expectations. This has been supported by favourable economic data and cuts to interest rates by the US central bank, the Federal Reserve (Fed). By encouraging investment flows into US, this has supported the value of the US dollar.

There are signs that this process is now in reverse. Economic growth in some advanced economies is set to flatline. There is growing concern over the huge deficits held by many Western governments. US interest rates are expected to decline and extended valuations in some areas of the stock market look unappealing. Can emerging markets pick up the slack?

Technology – not just designed in California

It may seem strange that both South Korea and Taiwan are classified as emerging markets. This reflects a number of ‘technical’ issues, including corporate governance, the proportion of shares available (free float) and foreign shareholder limits.

As an example, Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Company) is the global leader in manufacturing high-end microchips. It supplies these for use worldwide in AI systems, computers and smartphones. Its expertise at the high end of the market is unrivalled. South Korea’s Samsung and SK Hynix are also helping to drive the AI theme in Asia.

Yet emerging markets tech is not just about AI, nor does it have to be concentrated in Asia. Across Latin America and the Caribbean, 65% of electricity is generated from solar or wind sources. This compares with the global average of 41%⁵.

Fintech (financial technology) has also been a particular area of expertise for emerging markets. In Brazil, the central bank’s “Pix” instant payments network is the most popular payment method in the country⁶.

Looking ahead for the ‘next generation’

For more than a decade, developed equity markets have run ahead of their emerging market peers, underpinned by the strength of the US economy and its strong market returns. Yet in 2025 emerging markets outperformed the US and other key markets for only the third time since 2012.

There are signs the tides may have turned against developed markets. These include the possibility that the dollar will continue to weaken and concerns about stretched valuations. Meanwhile ageing populations across developed markets will continue to increase the pressure on government finances.

Emerging markets have also moved up the value chain. They are no longer catching up with developed markets. In many cases they are overtaking them. Many investors are calling time on the valuation gap between developed and emerging markets. Concerns about a bubble in AI and mega-cap shares has encouraged investors to seek opportunities beyond the US. This has been reinforced by long-term structural reforms across emerging markets. The lost decade for emerging market investing may be ending.

The full version of this article can be found in the latest Investor magazine.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. Past performance is not indicative of future performance.

Sources

¹ International Monetary Fund F&D Magazine, ‘Emerging Markets on the Global Stage’, September 2024
² US Census Bureau, ‘International Database: World Population Estimates and Projections’, accessed December 2025
³ International Monetary Fund, ‘Real GDP growth’, accessed January 2026
⁴ The World Bank, ‘Global Economic Prospects, Highlight from Chapter 1: The Global Outlook’, January 2026
⁵ Ember, ‘Latin America and Caribbean: clean power replacing emissions-intensive fossil fuels’, November 2025 15 Ember, ‘Saudi Arabia: power sector overview’, May 2025
⁶ European Payments Council, ‘Pix: the latest updates on Brazil’s leading instant payment scheme’, May 2024