Re-thinking Emerging Market Equities

Emerging-market (“EM”) equities have long offered access to expanding emerging economies at attractive valuations. The difficulty has been translating that economic potential into consistent returns for shareholders for several structural reasons:

• Weak capital allocation and dilution: Expansion and policy objectives often took priority over shareholder returns. Equity issuance, related-party transactions and low-return investment weakened EPS growth even when aggregate profits increased.

  
  

• Cyclical market composition: EM benchmarks were concentrated in banks, resources and export manufacturers. These capital-intensive sectors, being cyclical in nature, were vulnerable to commodity downturns and weaker global trade, unlike the asset-light and cash-rich technology leaders driving developed-market returns.

  
  

• Currency and funding vulnerability: Currency depreciation reduced dollar returns for international investors. Foreign-currency debt, current-account deficits and reliance on external funding also intensified the impact of higher US rates and tighter global liquidity.

  
  

• Governance and policy risk: State intervention, weak minority-shareholder protections, limited disclosure and unpredictable regulation reduced confidence in how corporate cash flows would be distributed.

  
  

Today, improvements in the sources of corporate earnings, the management of capital and the resilience of many economies provide reasons to reassess the opportunity. Four structural developments bolster the attractiveness of EM equities:

• Changing earnings drivers: AI infrastructure, advanced manufacturing, critical commodities, electrification and selected domestic markets are creating opportunities across a wider range of businesses.

• Stronger financial foundations: Deeper domestic capital markets, larger reserve buffers and more credible monetary frameworks have reduced some longstanding vulnerabilities.

• Greater emphasis on shareholder returns: In selected markets, reforms are encouraging more disciplined investment, dividends and buybacks.

• Trade policy and supply chain re-alignment: Efforts to diversify suppliers and avoid trade barriers and transport chokepoints are creating opportunities for selected EM manufacturers, resource exporters and logistics providers.

  
  

The opportunity therefore lies in identifying companies that can convert structural growth into durable earnings and cash flow, while pricing currency, governance, concentration and policy risks appropriately.

What has changed?

New engines for emerging market growth have emerged. China once the largest component of the MSCI EM index no longer dominates the wider EM equity narrative. China’s recovery remains uneven, with weaknesses in domestic demand and the fragile property sector.

Two structural themes beyond China have revamped emerging markets.

Technology: Taiwan and South Korea have emerged as technology leaders and provide the semiconductor and hardware infrastructure on which AI and digital innovation rely.

Demographics: India and several South-East Asian economies benefit from younger populations, supporting labour-force growth, rising incomes and expanding domestic consumption.

The opportunity extends beyond Asia: Mexico benefits from nearshoring, Brazil offers exposure to financials, utilities, commodities and renewables, while Latin America’s growing digital adoption supports financial inclusion. In EMEA, selected opportunities are emerging in renewable energy, infrastructure and financial-sector development.

Valuations add support but fundamentals remain core

EM equities have historically traded at a significant discount compared to developed markets. Cheapness by itself is rarely a catalyst; value traps abound without fundamental drivers.

In our view, differences in sector composition, profitability and governance account for part of the discount of the broad EM class. This demonstrates why the headline valuation gap cannot automatically be treated as mispricing.

• Perceived risk: In an economic environment characterised by tightening financial conditions, lower risk appetite and a broader contraction in liquidity, capital rotates into safe havens or lower-risk assets. Investors tend to divest from the most volatile and least liquid assets to protect their capital. In such contexts, emerging market equities are likely to experience higher drawdowns due to their higher perceived risk and lower liquidity, implying higher risk and liquidity premiums and lower valuation multiples.

  
  

• Lower shareholder returns: Historically, across selected emerging markets, repeated share issuances, low-return investment and the pursuit of state or controlling-shareholder objectives has weakened per-share value creation. Despite reforms being made to enhance shareholder value in specific emerging countries, there is still uncertainty over how much corporate growth will ultimately reach shareholders through higher EPS or dividend payments. For instance, China, despite experiencing years of high single-digit GDP growth, generated limited earnings growth from its equity markets, dominated by state-owned enterprises.

  
  

• Currency volatility: For unhedged international investors, the increased volatility of emerging market currencies raises the risk linked to the fluctuation of the overseas value of dividends and capital gains even when a company’s domestic operations perform strongly. Therefore, the higher currency risk further compresses valuation multiples for emerging markets.

  
  

• Earnings cyclicality and tech concentration: Resource producers in Latin America and South Africa are sensitive to commodity prices, while prominence of Taiwanese and South Korean technology companies in the MSCI EM Index concentrates exposure to global semiconductor demand and AI infrastructure spending. A slowdown in investment or excess capacity could therefore weaken earnings across several major constituents simultaneously. While companies with durable earnings may command a premium, the overall cyclical and concentration risks associated with EM potentially command lower valuation multiples.

Valuation Metric	MSCI EM	MSCI World	MSCI USA	EM discount vs World	EM discount vs USA
Forward P/E	10.07x	18.55x	20.06x	45.70%	49.80%
Trailing P/E	15.23x	23.20x	25.80x	34.40%	41.00%
Price-to-book	2.40x	4.12x	5.69x	41.70%	57.80%

Source: MSCI, 31 August 2026

EM equities are, however, supported by solid fundamentals, including robust earnings growth forecasts, attractive valuations and diversification benefits with developed-market equities. The market’s historical risk premium, embedded across risks related to institutional viability, quality of information and macro-economic strength, still depresses EM multiples as shown above.

Political instability, less mature legal frameworks and currency volatility remain key risks. However, when taking into account the valuation gap, high expected earnings growth and emerging markets reforms in selected regions, there could be attractive risk-adjusted investment opportunities.

Source: Lazard Asset Management, Data as at 31 May 2026

Fundamental drivers for Emerging Market equities

1. Changing earnings drivers

Sector composition in emerging markets has changed, with the MSCI EM having a 41.6% (Source: MSCI) exposure to the information technology sector compared to 29.8% for the MSCI World, as of 31 August 2026. Taiwan and South Korea occupy critical positions in AI hardware through TSMC, Samsung and SK Hynix. Their exposure connects global cloud and AI spending directly to orders for advanced logic chips, high-bandwidth memory and specialised manufacturing. As the largest U.S.-based hyperscalers continue to commit hundreds of billions in AI capital expenditures, new revenues are flowing directly into these Taiwanese and South Korean companies and their countries’ wider economies.

• Higher-value products support margins. Technological complexity and scarce manufacturing expertise can support pricing, while increased factory utilisation spreads fixed costs across greater output. Earnings can consequently grow faster than revenue.

  
  

• The AI investment cycle extends well beyond semiconductor manufacturers. Data centres also require advanced networking equipment, industrial systems and dependable power, creating investment opportunities in electricity generation, uranium and other critical materials. These place selected emerging-market producers upstream in the expanding digital-infrastructure value chain.

  
  

• The IEA projects global data-centre electricity consumption to rise from 485 TWh in 2025 to 950 TWh in 2030, approximately 96% growth (Source:IEA).

  
  

• Many of the minerals needed for both AI infrastructure and the energy transition including copper, uranium and rare earths have economically viable reserves and production concentrated in selected emerging markets such as Indonesia, South Africa, China and Latin American emerging countries.

Share of minerals production globally by country

Source: IEA, 2025

2. Stronger financial foundations

Emerging markets have strengthened several of the financial structures that previously amplified external shocks. For equity investors, the potential benefit is more durable corporate earnings: fewer financing disruptions, less pressure on balance sheets and greater capacity to sustain investment through difficult conditions.

• Local-currency financing reduces currency mismatches: The rise in deeper domestic bond markets and broader local investor participation in EM signal important improvements in their economic resilience. Borrowing in currencies aligned with domestic revenues reduces the risk that depreciation sharply increases debt burdens. Indonesia illustrates the shift towards domestic ownership: foreign investors’ share of rupiah-denominated government bonds declined from 38.8% in 2019 to 12.6% in April 2026. However, benefits are weaker where domestic savings are limited, and excessive government-debt holdings can transmit sovereign stress into local banks.

  
  

• Larger reserve buffers strengthen protection against external shocks: Emerging and developing economies covered by the IMF’s July 2026 External Sector Report held US$7.46 trillion in gross official reserves in 2025, compared with US$6.72 trillion in 2024 (Source: IMF). These buffers provide capacity to meet foreign-currency liquidity needs during capital outflows, helping businesses maintain imports, production and financing. However, the capacity to withstand capital outflows varies substantially across EM. For instance, Thailand’s reserves stood at 231% of the IMF’s reserve-adequacy benchmark, compared with 79% in Turkey at end-2025.

  
  

• Greater policy capacity improves resilience: Stronger inflation-targeting frameworks and greater central-bank independence and responsiveness have improved many EMs’ ability to manage external shocks. Flexible exchange rates can absorb part of the adjustment, while credible monetary policy helps prevent temporary price increases from becoming persistent inflation. A telling moment came in 2021, when central banks in several emerging economies were quicker to raise interest rates than the Federal Reserve, supporting their currencies and fighting inflation through the tightening.

3. Greater emphasis on shareholder returns and corporate governance

An important development in selected emerging markets is the growing pressure on companies to demonstrate how their capital decisions benefit shareholders. Reforms encouraging greater transparency, clearer capital-allocation policies and cash distributions address a longstanding weakness in EM investing: economic and corporate growth did not always translate into value per share.

• There is tangible evidence of change. The South Korean government, for example, has launched a formal initiative to address the persistent valuation gap between South Korean and global markets due to relatively poor corporate governance. For instance, South Korea’s financial regulator reported KRW43.1 trillion of treasury-share cancellations between January and May 2026, exceeding KRW21.4 trillion during the whole of 2025, alongside tighter disclosure requirements (Source: Financial Services Commission of Korea). These cancellations help prevent previously repurchased shares from being reissued, protecting shareholders from potential dilution and limiting management’s ability to transfer treasury shares to friendly investors to reinforce control.

  
  

• Another example is China’s “anti-involution” campaign targets price wars and overcapacity by curbing excessive investment, tightening product standards and restricting certain local subsidies. The aim is to reduce oversupply and pressure on profit margins, encouraging competition based on quality and sustainable profitability. The shareholder-value rationale is to restrain expansion that erodes margins and generates inadequate returns, preserving capital for productive investment or distributions, encouraging capital discipline.

4. Trade policy and supply chain re-alignment

• US tariffs on Chinese goods have encouraged buyers to source from alternative manufacturing hubs, redirecting orders and investment towards selected EMs. Mexico’s established automotive and electronics supply chains have helped manufacturers gain US market share, while Malaysia has also benefited from trade diversion. Tariff-related shifts accounted for approximately 45% of the increase in Mexico’s exports to the US between 2017 and 2023 (Source: IMF)

  
  

• The Hormuz disruption exposed the vulnerability of relying on several suppliers whose exports pass through the same chokepoint. According to the IEA, oil flows through the strait fell from approximately 20 million barrels a day before the conflict to an average of 2.7 million during March to May 2026. This prompted buyers to seek alternative suppliers and transport routes, creating identifiable opportunities within EM.

• Brazil captured redirected oil demand. China purchased a record 1.6 million barrels a day of Brazilian crude in March 2026, helping lift Brazil’s total crude exports to their second-highest monthly level. Atlantic export routes provided access to replacement supplies without passing through Hormuz, translating geographical diversification into additional demand for Brazilian producers. (Source: Reuters)

  
  

• Indian refiners supplied markets facing shortages. Reliance Industries loaded approximately 4–5 million barrels of diesel for Europe in July, its highest level in ten months, as Middle Eastern disruptions and Russia’s export restrictions tightened fuel availability. This illustrates how established processing capacity and access to alternative crude supplies enable selected EM businesses to capture demand in higher-priced markets. (Source: The Economic Times)

Associated risks

• Currency and funding risks remain material: Dollar strength and tighter global liquidity can weaken EM currencies and increase refinancing costs, particularly for borrowers with foreign-currency debt. Currency depreciation can also erode international investors’ returns even when local share prices rise. Deeper domestic debt markets reduce these vulnerabilities but do not eliminate exposure to global financial conditions.

  
  

• Cheap valuations require scrutiny: EM valuation discounts can reflect weak governance, policy uncertainty and doubts about sustainable profitability. Low forward P/E ratios also depend on earnings forecasts that may prove optimistic. If profits disappoint or shareholder reforms fail to deliver, the discount can persist, leaving economic growth disconnected from investor returns.

  
  

• Global crises can trigger broad EM selling: Fund redemptions and forced sales can spread selling pressure across countries despite differences in their fundamentals. Stronger economic foundations therefore do not prevent sharp market declines, and diversification benefits can weaken when investors reduce exposure across the asset class.

  
  

• Trade and commodity exposure leave earnings vulnerable: Broader domestic demand has not removed EM companies’ dependence on global trade. Tariffs can disrupt manufacturing exports, while weaker commodity demand can pressure resource producers. Conversely, higher oil prices increase costs for energy importers. These exposures mean that long-term opportunities in AI, infrastructure and electrification remain vulnerable to economic slowdowns and geopolitical shocks.

Portfolio implications

Emerging-market equities should be approached as a broad, multi-dimensional opportunity set rather than a single bet on China, India or global trade. The durable investment case lies in combining structural growth with disciplined control of concentration, valuation, currency and governance risks.

• Use EM for diversification: Distinct country, sector and economic drivers, together with historically lower correlations with developed markets over particular periods, can provide additional sources of portfolio returns.

  
  

• Capture structural growth: EM equities offer exposure to rising domestic consumption, stronger intra-EM trade, AI infrastructure, the green transition, industrial metals and increasing power demand.

  
  

• Prioritise selective active exposure: Wide differences across countries, sectors, currencies and issuers create opportunities beyond benchmark weights. Active management can help access individual opportunities while addressing the concentration of major index constituents.

Conclusion

Emerging-market equities are no longer simply a high-beta expression of commodities, China or global growth. Their investment case now rests on a broader combination of discounted valuations, stronger macroeconomic foundations, rising domestic demand and strategic positions in AI, energy and industrial supply chains.

These advantages do not eliminate volatility, and the opportunity remains uneven across countries, sectors and companies. For long-term investors, EM exposure should therefore be built selectively, with close attention to per-share earnings, balance-sheet strength, governance, liquidity and entry valuations.

Approached in this way, selected emerging markets can provide access to structural growth and differentiated return drivers that remain under-represented in many developed-market portfolios.