A structural shift in emerging markets has created a compelling long-term opportunity

Authors:

• Cornelius Zeeman, Fairtree Equity Portfolio Manager
• Karena Naidu, Fairtree Global Investment Specialist

Emerging markets (EM) continue to present some of the most dynamic and attractive investment opportunities in global equities. These economies are evolving rapidly, benefiting from structural shifts, technological advancements, and rising consumer demand. The result is a broader and more resilient opportunity set than in previous market cycles, underpinned by stronger corporate fundamentals, deeper capital markets, and improving policy frameworks across key regions.

Despite these positive developments, emerging markets remain under-owned and undervalued relative to developed markets. Many investors still anchor their perception of EM to the commodity-heavy, policy-uncertain era. However, the composition of the EM universe today is considerably more innovative, diversified and aligned with global growth trends. This disconnect between perception and reality creates an attractive entry point for long-term investors.

The EM benchmark has undergone a fundamental transformation over the last decade, both in sector composition and country composition. The traditional view of emerging markets as a primarily commodity-exposed, capital-intensive economy no longer holds.

Sector composition: From cyclical and asset-heavy to growth and innovation

In 2010, sectors such as energy, materials and telecommunications made up close to 45% of the index. These industries were generally cyclical, sensitive to commodity demand, and capital-heavy. Today, that exposure has fallen meaningfully, replaced by high-growth, capital-light industries including semiconductors, e-commerce and fintech.

This shift reflects the growing importance of innovation and technology across emerging economies. Notably, the MSCI EM benchmark now has greater exposure to growth and technology-linked industries than the MSCI ACWI benchmark.

This sector composition, as shown in Graph 1, makes the asset class structurally more compelling, with better long-term earnings potential, stronger free cash flow generation and reduced reliance on commodity cycles.

Graph 1: MSCI EM sector composition

Source: Fairtree, Bloomberg as at December 2024

Country composition: From commodity exporters to structural growth leaders

A similar transformation has taken place at the country level. In 2010, commodity-exporting nations such as South Africa, Brazil and Russia made up almost 30% of the index; today their combined weight has fallen below 8%. In their place, the index has seen rising exposure to economies such as India, China, Taiwan and South Korea, as shown in Graph 2.

India is benefitting from sustained infrastructure investment, rapid digitisation and strong demographics, while China is emerging from a cyclical trough with targeted stimulus and a more supportive policy stance. Taiwan and South Korea continue to lead globally in semiconductors and advanced manufacturing. This shift has reduced reliance on commodity-driven cycles and increased exposure to globally competitive, innovation-led industries.

Graph 2: MSCI EM country composition

Source: Fairtree, Bloomberg as at December 2024

Favourable environment for active allocation: Dispersion creates opportunity

One of the most compelling aspects of emerging markets remains the significant dispersion in country-level returns. Across cycles, it is common to see 50% gaps in performance within the EM universe in a given year. This is driven by varying reform cycles, policy backdrops, interest-rate environments and domestic economic developments. Periods of political or macro uncertainty often create attractive entry points, while policy progress and reform announcements frequently catalyse sharp rallies. The ability to actively allocate across markets to capture these turning points remains a key advantage in EM.

This dispersion supports a constructive view on active management in EM, where capital can be rotated to markets entering favourable cycles while moderating exposure to those facing temporary policy or macro headwinds.

Graph 3: Total USD returns p.a. in key emerging markets

Source: Fairtree, Bloomberg as at December 2024

Emerging market discount remains despite improved quality

Despite this improved index composition and the attractive opportunity set, emerging markets continue to trade at a meaningful discount to global equities. Over the last decade, emerging market valuations relative to developed markets have not re-rated, even as the asset class has become structurally more attractive. The MSCI EM Index trades at a notable forward P/E discount to the MSCI ACWI, as shown in Graph 4.

Graph 4: MSCI EM vs. MSCI ACWI forward P/E (12m blended)

Source: Fairtree, Bloomberg as at 31 October 2025

This suggests that markets have not yet fully recognised improved quality and sector composition, better alignment between policy priorities and private capital, corporate governance improvements and capital-return initiatives, structural innovation and technology leadership in key EM economies.
At the same time, policy support has strengthened in several major markets, for example, China’s recent “nine measures” to support growth and capital markets, and Korea’s Value Up initiative to incentivise greater shareholder returns. These reforms support a more shareholder-friendly landscape going forward.

Adding to this, a period of US dollar softness historically benefits emerging markets. After a multi-year period of dollar strength, a softer trend is supportive of capital flows, asset prices and corporate earnings across EM economies.

Conclusion
Emerging markets have evolved meaningfully, with stronger structural growth drivers, improved policy stability, and higher-quality index composition than in the past. Yet valuations have not fully adjusted to reflect these improvements, offering an attractive entry point for long-term investors.

With structural reform, increased shareholder-friendly initiatives, and a more favourable currency environment, emerging markets are well-positioned to participate in a new phase of global equity leadership. As global investors reassess concentration risk in developed markets and seek diversified sources of growth, emerging markets represent an increasingly attractive opportunity set.