Global markets often respond directly to the economic movements of the United States, and emerging markets (EMs) are no exception. When the US economy is experiencing stable growth without extreme highs or lows, known as a “Goldilocks scenario,” it typically brings a heightened appeal to EMs. The recent interest rate cut by the US Federal Reserve—the first in four years—contributes to this ideal. While an economic downturn doesn’t seem imminent in the US, this easing of interest rates is likely to enhance capital flows into EM assets. A weaker dollar and lower yields in the US make investments in EMs more attractive, potentially boosting these markets.
This interest rate adjustment by the Fed may also influence central banks in EM regions, especially in Asia, encouraging them to implement policy changes that promote growth. This approach could pave the way for increased economic activity across various EM countries.
Emerging markets have demonstrated robust consumption rates, surpassing those seen in more developed economies. Key factors such as rising incomes and growing urban populations drive this trend, with countries like India, Indonesia, and Vietnam already showing promising levels of economic vitality. As central banks adopt looser monetary policies, these markets could see even more investment in the short-to-medium term. Looking further ahead, spending habits in these regions may increasingly resemble those of higher-income economies. Projections suggest that by mid-century, Asia will lead global consumption trends.
In recent years, EMs have also seen notable governance improvements. In Japan, a set of governance reforms introduced in 2024 is already enhancing business performance and sparking renewed interest from investors. South Korea and China are now looking to adopt similar reforms. For instance, South Korea’s Corporate Value-up Program encourages companies to adopt more shareholder-friendly policies, a shift the Financial Services Commission describes as “fundamental changes” in its capital markets. Meanwhile, China’s State Council is aiming to create a stable, transparent, and open market environment. As part of this initiative, underperforming businesses may face delisting if they cannot demonstrate improved performance.
The artificial intelligence (AI) revolution is another significant development affecting EMs, as many of these markets are crucial to global tech supply chains. Countries in Asia are particularly active in this space, with South Korea and Taiwan leading in semiconductor production. Thailand has made progress in printed circuit boards, while Malaysia is emerging as a hub for engineering and software expertise. Vietnam, too, has established a foothold in electronics manufacturing. Notably, investment opportunities in this sector extend beyond the industry giants. Numerous smaller companies in the region are capitalising on the AI boom, yet many still remain off the radar for most investors.
In the broader context, investment opportunities span a wide range of geographies and sectors, offering investors the chance to diversify. EMs in Asia and beyond present an array of options that can add balance to portfolios, especially valuable in times of volatility. Within these markets, companies across the market capitalisation spectrum, including smaller firms, often hold potential for long-term growth, making them attractive prospects for investors aiming to broaden their exposure to EMs.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
