The momentum behind emerging market equities is undeniable. In 2024, the MSCI EM Index delivered an 18.5% return (AUD), and the strong fundamentals underpinning these economies suggest continued positive performance in 2025. The global investment landscape is shifting, and emerging markets stand out as a compelling opportunity for investors seeking growth and resilience.
Emerging market equities have experienced a period of derating, leaving valuations exceptionally attractive. Despite this, many investors remain underweight in the asset class, largely due to the outperformance of developed markets, which has been fuelled by aggressive fiscal spending and accommodative central bank policies. However, as developed economies face mounting deficits and persistent inflation, emerging markets offer a fundamentally stronger investment case. Fiscal balances are healthier, debt-to-GDP ratios are more sustainable, and corporate balance sheets are in a solid position.
A key factor influencing emerging market performance in 2025 will be the US dollar. As its momentum peaks, structural concerns surrounding the US government’s fiscal position and policy uncertainties are likely to weaken the currency. A softer US dollar historically benefits emerging markets, making their equities more attractive and supporting capital inflows.
The long-term outlook for emerging markets remains strong, driven by several key themes:
Many developing economies possess significant endogenous growth drivers. Decades of economic reform have improved infrastructure and manufacturing capabilities. A rapidly expanding middle class, coupled with youthful demographics, will drive domestic consumption and investment, allowing these markets to grow faster than their developed counterparts.
Attractive stock market valuations present an opportunity for long-term investors. Many emerging market stocks offer strong dividend yields and earnings growth potential, with further capital inflows expected to drive valuations higher.
China remains a key player in the emerging market story. Concerns over structural issues are widely known and reflected in the low valuations of Chinese equities. However, recent policy shifts—such as relaxed fiscal policies, monetary easing, and renewed support for the property sector—are already having a positive impact. The Chinese economy is stabilising, and the government is committed to achieving growth targets of 4.5-5% in 2025.
The trade tensions between the US and China will persist, but the impact on China’s economy appears manageable. The Chinese government is proactively supporting the economy through fiscal and monetary measures, and the country has successfully diversified its export markets. ASEAN has overtaken the US as China’s largest trading partner, and supply chain adjustments have mitigated tariff risks.
Beyond China, other emerging markets are set to benefit from global trends. Taiwan and South Korea, home to key players in the semiconductor industry, are positioned to capitalise on the continued expansion of AI-driven technologies. Companies like TSMC and SK Hynix remain integral to the global technology supply chain, and the demand for high-performance computing chips will sustain growth in 2025 and beyond.
ASEAN nations continue to emerge as economic powerhouses. Indonesia, with its abundant natural resources and growing consumer base, is attracting significant foreign direct investment (FDI). The country’s stable fiscal position, low household debt, and strategic location make it a prime destination for manufacturing expansion and infrastructure investment. Meanwhile, Vietnam is rapidly establishing itself as a global manufacturing hub. With a young workforce, strong FDI inflows, and extensive trade agreements, Vietnam offers a compelling long-term investment opportunity, reminiscent of China’s growth trajectory in the early 2000s.
Latin America presents a mixed picture. While near-term volatility remains a concern, the region’s long-term prospects are supported by its vast commodity reserves. As demand for critical minerals such as lithium, copper, and silver rises, Latin American economies stand to benefit significantly. Mexico, in particular, has solidified its position as the largest exporter to the US, capitalising on nearshoring trends. However, policy uncertainty and economic dependence on the US pose risks.
India’s long-term fundamentals remain attractive, but economic headwinds could weigh on equity performance in the near term. Signs of a slowdown are evident, with weaker credit growth, declining consumer savings, and rising living costs impacting demand. Despite this, India remains a major force in global markets, benefiting from its strategic geopolitical position and ongoing structural reforms.
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.
