Emerging Market Funds in 2025: High-Reward Play or Just Another Wall Street Mirage?

Frontier markets roar back—but can you stomach the volatility?

Forget ’safe’ developed markets. The real action—and real risk—lives in emerging equities this year. Funds targeting Brazil, India, and Vietnam surge 27% YTD... right before Argentina’s peso collapse wiped out a quarter of that gain overnight.

Growth hunters pile in as inflation cools

With US rates plateauing, yield-chasing capital floods EM debt markets. Local currency bonds now offer 9-12% returns—if you ignore the landmines of capital controls and liquidity traps.

Structural advantages meet old-school corruption

Tech adoption outpaces the West (Vietnam’s digital payments up 300% since 2022), but good luck navigating Indonesia’s 17-layer permitting process. Every prospectus should come with a bribery risk score.

Closer: The smart money’s hedging with crypto—because when governments ’stabilize’ currencies, someone’s always holding the bag.

What Are Emerging Market Equity Funds?

At their core, emerging market (EM) equity funds are investment funds, typically structured as mutual funds or Exchange Traded Funds (ETFs), that primarily invest their assets in the stocks (equities) of companies located in countries with developing economies. An emerging market is generally understood as a nation that is on a clear path of economic development and industrialization, with the prospect of soon achieving developed market status. These economies are often characterized by rapid growth phases.

Emerging market equity funds are distinguished by several Core characteristics:

• Pursuit of High Returns: They aim to capitalize on the potentially high returns offered by economies experiencing rapid growth and transformation. This “growth premium” expectation is a primary allure for investors, who anticipate that faster economic expansion in these regions will translate into superior equity performance compared to more mature, developed markets.
• Diversification Potential: These funds typically offer diversification by spreading investments across a range of countries, various industry sectors, and companies with different market capitalizations.
• Elevated Risk-Reward Profile: It is a well-established notion that EM investments generally carry higher risk but also offer the prospect of greater rewards when compared to investments in developed markets. The very term “emerging” implies a state of development and transition, which inherently involves greater uncertainties and less mature economic and regulatory structures.

The fundamental attraction of emerging market equity funds lies in the “mantra” of identifying and participating in opportunities that are poised for significant and rapid growth. Investors are often drawn to the potential to capitalize on long-term global economic shifts, the rise of new economic powerhouses, and the development of previously untapped markets. Investing in these markets is seen as a way to participate in the future of global economic evolution.

Top 5 Opportunities in Emerging Market Equity Funds

Investing in emerging market equity funds can unlock a range of potential benefits for discerning investors. These opportunities stem from the unique economic and demographic landscapes of these developing nations.

Opportunity

Brief Description

1. High Growth Potential

Economies expanding faster than developed markets, offering potential for significant capital appreciation.

2. Portfolio Diversification

Lower correlation with developed markets can reduce overall portfolio volatility and enhance risk-adjusted returns.

3. Favorable Demographics & Urbanization

Young, growing populations and increasing urbanization fuel economic activity and productivity.

4. Expanding Middle Class & Consumer Demand

Rising incomes lead to increased spending on goods and services, creating investment opportunities.

5. Infrastructure Development Boom

Massive investments in infrastructure create demand in construction, materials, and related sectors.

The primary allure of emerging markets is their potential for superior economic growth compared to their developed counterparts. Projections consistently indicate that EM economies will expand at a significantly faster pace. For instance, the International Monetary Fund (IMF) has projected that emerging and developing economies will grow at 3.9% per year over the next five years, more than double the 1.7% anticipated for advanced economies. Some analyses suggest EMs could drive global economic growth at an average rate of 4.06% through 2035, compared to 1.59% in advanced economies. Indeed, emerging markets are often cited as accounting for as much as 80% of the world’s growth. This accelerated growth is typically fueled by factors such as ongoing industrialization, the rapid adoption of new technologies, and increasing integration into the global economic fabric. For investors, this translates into the potential for significant capital appreciation as companies within these economies flourish.

Emerging market equities can serve as an important tool for portfolio diversification, particularly for investors with significant holdings in U.S. and other developed international markets. Historically, EM equities have exhibited lower correlations with developed market equities. This means their price movements do not always align perfectly, offering a potential buffer when developed markets face downturns. The unique economic and market cycles prevalent in emerging economies further enhance these diversification benefits. As these economies mature and develop strong domestic demand drivers, their independent market cycles can provide a valuable counterpoint to developed market trends. Including EM equities in a global portfolio has the potential to improve overall risk-adjusted returns; analysis has shown that a blended portfolio of emerging and developed market equities could have historically generated higher returns with only a marginal increase in volatility compared to a developed markets-only portfolio. This diversification is not merely geographic; it also extends to cyclical diversification, as EMs may be at different stages of their economic cycles or influenced by different growth drivers than developed nations, proving particularly valuable when mature markets encounter headwinds.

Many emerging markets boast a significant “demographic dividend” characterized by young, growing populations. For example, in 2022, approximately 66% of the population in developing economies was under the age of 40, compared to 47% in developed economies. Excluding China, this figure for developing economies rises to 71%. Projections indicate that by 2025, a staggering 90% of the world’s working-age population will reside in emerging market countries. This youthful demographic profile translates into a larger future workforce, a growing consumer base, and potentially higher productivity.

Concurrent with these demographic shifts is the powerful trend of increasing urbanization. Urbanization rates in developing economies, which stood at 52% in 2022 (versus approximately 80% in developed economies), are expected to climb to 65% by 2050. This migration to cities typically drives economic growth by improving access to infrastructure and services, thereby boosting productivity levels and creating demand for housing, consumer goods, and a wide array of services. These demographic and urbanization trends represent long-term structural tailwinds that can fuel economic expansion for decades.

Sustained economic growth in emerging markets is leading to a significant expansion of the middle class, characterized by rising disposable incomes and evolving lifestyle aspirations. It is estimated that by 2030, two-thirds of the global middle class will reside in emerging economies. This burgeoning middle class acts as a powerful engine for domestic demand, fueling increased spending across a broad spectrum of goods and services – from basic necessities to discretionary items like luxury goods, advanced healthcare, and travel. As incomes rise, consumption patterns in EMs tend to shift, increasingly resembling those observed in higher-income, developed economies. This creates a virtuous cycle where domestic demand becomes a more significant driver of economic growth, potentially reducing the historical reliance of some EMs on exports.

Emerging market nations are often in the midst of substantial efforts to upgrade and expand their physical infrastructure, including transportation networks (roads, railways, ports, airports), energy generation and distribution systems, water and sanitation facilities, and telecommunications networks. The scale of this undertaking is immense; the Global Infrastructure Hub estimates that emerging economies will require approximately $97 trillion in infrastructure investments by the year 2040. This massive wave of spending creates direct and indirect investment opportunities in sectors such as construction, building materials, engineering services, and utilities. Infrastructure development is a foundational element for broader economic progress, enabling other sectors to thrive and improving overall productivity.

The opportunities presented by emerging markets are often interconnected. Favorable demographics contribute to a growing workforce, which, when combined with urbanization and improvements in education, fuels the expansion of the middle class. This, in turn, drives consumer demand, necessitating further infrastructure development and creating fertile ground for high-growth companies. Underlying these specific opportunities is a broader “catch-up” phenomenon, where EMs converge towards developed market standards in economic structure, technology, infrastructure, and consumption, offering a long-term growth trajectory.

Top 5 Risks to Consider with Emerging Market Equity Funds

While the allure of high growth is strong, investing in emerging market equity funds is not without significant risks. These markets are often characterized by greater volatility and uncertainty compared to their developed counterparts.

Risk

Brief Description

1. Political and Geopolitical Instability

Unstable governments, abrupt policy shifts, and regional conflicts can severely impact economies and investments.

2. Economic Volatility (Inflation, Currency)

Rapid growth can lead to high inflation; currency fluctuations against major currencies can erode investment returns.

3. Market Liquidity & Capital Access Challenges

Lower trading volumes can lead to price volatility and difficulty in buying/selling; firms may struggle to raise capital.

4. Corporate Governance & Regulatory Hurdles

Weaker corporate governance standards, evolving regulations, and lax enforcement can pose significant risks to investors.

5. Country-Specific Shocks & Contagion Effects

Idiosyncratic events in one emerging market can negatively impact others, especially within the same region; sentiment can spread.

Emerging markets can be susceptible to political instability, with governments that may be less stable or more prone to sudden changes in leadership or policy. Political unrest, including civil disturbances or conflicts, can have severe and immediate negative consequences for the economy and investor assets. Specific risks include adverse government actions such as expropriation or nationalization of assets, unexpected changes in taxation or subsidy policies, the outbreak of war or regional conflicts, and disruptions to industry due to political turmoil. Political stability is a fundamental prerequisite for economic confidence and sustained investment; its absence introduces a high degree of uncertainty and risk.

The rapid economic growth often seen in emerging markets can, at times, lead to undesirable side effects such as high inflation. If not effectively managed by monetary authorities, high inflation can erode the real value of investment returns.

A more pervasive and often impactful risk is currency volatility, also known as foreign exchange rate risk. Emerging market currencies can experience significant and sometimes abrupt fluctuations against major global currencies like the U.S. dollar. A sharp devaluation of an EM currency can substantially reduce or even negate investment gains when those returns are converted back into the investor’s home currency. Other macroeconomic risks can include shortages of essential labor or raw materials, inadequately regulated markets, and the implementation of unsound monetary or fiscal policies by governments.

Stock markets in emerging economies frequently exhibit lower trading volumes and liquidity compared to those in developed markets. This illiquidity can manifest in several ways detrimental to investors: wider bid-ask spreads (the difference between buying and selling prices), potentially higher brokerage fees, increased price uncertainty, and difficulties in executing trades, especially large ones, at desired price levels without adversely affecting the market price.

Furthermore, companies in emerging markets may face challenges in raising capital due to less developed banking systems or nascent capital markets. This can lead to a higher weighted average cost of capital (WACC) for these firms, potentially limiting their ability to undertake growth projects and expand.

Standards of corporate governance in some emerging markets may not be as robust or transparent as those in developed countries. This can include situations where company management or even government entities exert undue influence over corporate decisions, potentially at the expense of minority shareholders. Issues such as lax enforcement of insider trading restrictions and various forms of market manipulation can lead to market inefficiencies, where equity prices deviate significantly from their intrinsic values.

Institutional or regulatory risk is also a key concern. The legal and regulatory frameworks in emerging markets are often still in a state of development and implementation, which can create an unpredictable environment for businesses and fund managers. Abrupt changes in regulations or inconsistent enforcement can pose significant challenges. Weaker accounting standards and audit procedures in some EMs can also elevate the risk of corporate malfeasance or even bankruptcy.

It’s important to recognize that emerging market security returns may not always follow the patterns of normal distribution often assumed in developed market analysis, making historical data potentially less reliable for forecasting future performance or correlations. Each emerging market possesses its own unique set of economic, political, and social characteristics, leading to idiosyncratic risks.

Moreover, a significant shock or crisis in one emerging market can sometimes trigger a “contagion” effect, spreading negative sentiment and financial pressure to other EMs, particularly those within the same geographic region or those perceived by investors to share similar vulnerabilities. This can happen even if the underlying fundamentals of the other affected countries are sound.

These risks are often interconnected. For instance, political instability can precipitate unsound economic policies, leading to currency devaluation and capital flight, which in turn exacerbates market liquidity problems. A weak regulatory environment can allow such issues to escalate. The culmination of these risks typically results in higher volatility for EM assets compared to their developed market counterparts. This inherent volatility underscores the necessity for investors to adopt a long-term perspective. Among these risks, poor corporate governance stands out as a critical underlying factor that can magnify others; if companies are not managed transparently and in the best interests of all shareholders, even robust economic growth may not translate into favorable investor returns.

A Smart Investor’s Guide to Emerging Markets

Successfully investing in emerging markets requires a nuanced understanding of the available fund types, the benchmarks they follow, diligent research practices, and a clear assessment of one’s own investment objectives and risk tolerance.

5.1. Decoding Fund Types: Tailoring Your EM Exposure

Not all emerging market funds are created equal. They vary significantly in their scope, focus, and risk profiles, allowing investors to choose options that best align with their specific strategies.

• Broad-Based Emerging Market Funds: These are often the default choice for investors seeking diversified exposure to emerging markets. They invest across a wide array of EM countries and sectors, typically aiming to replicate the performance of a major benchmark index such as the MSCI Emerging Markets Index or the FTSE Emerging Index. They offer the most comprehensive and diversified approach to EM investing.
• Regional Funds: These funds concentrate their investments in specific geographic regions within the broader emerging markets universe. Common examples include funds focusing on Emerging Asia (often ex-Japan), Latin America, or EMEA (Europe, Middle East, and Africa). Regional funds allow investors to target areas they believe have particularly strong growth drivers or more favorable risk-reward profiles compared to other EM regions.
• Country-Specific Funds: Offering the most targeted exposure, these funds invest predominantly in the securities of a single emerging market country, such as an India Fund, a Brazil Fund, or a China Fund. While they allow for high-conviction bets on a particular economy’s prospects, they also come with significantly higher concentration risk compared to more diversified options.
• Thematic Funds: These funds invest based on specific investment themes or sectors within emerging markets. Examples could include EM Technology funds, EM Consumer Growth funds, EM Infrastructure funds, or EM Small-Cap funds. Thematic funds enable investors to capitalize on particular trends or industry growth stories they identify within the EM space.
• Ex-Country Funds: A notable category includes funds that exclude one or more specific countries from a broader emerging markets portfolio. A prominent example is “Emerging Markets ex-China” funds. These are designed for investors who desire exposure to the growth potential of emerging markets but wish to avoid or actively manage their exposure to a particularly dominant market like China, perhaps due to concerns about its outsized weight in broad indexes or specific geopolitical or regulatory risks.

The choice of fund type is a direct reflection of an investor’s risk appetite and the strength of their conviction regarding specific markets or themes. The spectrum ranges from the broad diversification of general EM funds to the highly concentrated bets of country-specific funds. The increasing availability of “ex-China” funds, for example, signals a growing investor desire to make more granular decisions about their EM exposure, particularly concerning the world’s second-largest economy and its significant influence on broad EM indexes.

Fund Type

Key Characteristics

Typical Investor Profile

Broad-Based EM Funds

Diversified across many EM countries & sectors; often tracks major EM indexes.

Seeking general, diversified EM exposure; core EM holding.

Regional EM Funds

Focus on a specific EM region (e.g., Asia, Latin America).

Has a specific view on a region’s prospects; wants targeted regional exposure.

Country-Specific EM Funds

Concentrated in a single EM country (e.g., India, Brazil).

High conviction on a particular country; higher risk tolerance.

Thematic EM Funds

Invests in specific themes (e.g., EM Tech, EM Small-Cap, EM Consumer).

Wants to capitalize on specific trends within EMs; understands sector/theme risks.

Ex-Country EM Funds

Excludes specific countries (e.g., EM ex-China) from a broader EM portfolio.

Wants EM exposure but wishes to avoid/manage risk of a dominant or specific country.

5.2. Understanding the Benchmarks: MSCI vs. FTSE

Most passive emerging market equity funds, and many active ones, benchmark their performance against an index provided by one of two dominant firms: MSCI Inc. and FTSE Russell. Understanding the key differences between their flagship emerging market indexes is crucial for investors.

Key Differences in Country Classifications:

A significant discrepancy lies in how MSCI and FTSE classify certain countries, which directly impacts index composition and, consequently, the holdings of ETFs that track them.

• South Korea: MSCI classifies South Korea as an emerging market. In contrast, FTSE considers South Korea a developed market. This is a major point of divergence, as South Korea represents a substantial portion of the EM equity universe by MSCI’s definition.
• Poland: Similarly, MSCI includes Poland in its emerging markets indexes, while FTSE upgraded Poland to developed market status in 2018.

These classification differences mean that an ETF tracking an MSCI Emerging Markets index will typically include South Korean and Polish equities, whereas an ETF tracking a FTSE Emerging index will not. This can lead to markedly different geographic exposures and performance outcomes. The absence of a large market like South Korea in the FTSE Emerging index tends to concentrate its holdings more heavily in other major emerging economies such as China, India, and Taiwan.

While both index providers now include Chinese A-shares (shares of mainland China-based companies denominated in renminbi and traded on Chinese stock exchanges), the historical timing of their inclusion and the capping percentages applied to their free-float market capitalization may have differed, leading to variations in China’s overall weight. The number of constituent companies also tends to vary, with the FTSE Emerging index generally including a larger number of stocks than the MSCI Emerging Markets Index.

Table: MSCI EM vs. FTSE Emerging Index – Key Country Weights Comparison (Illustrative)

17

Country

MSCI EM Weight (%)

FTSE Emerging Weight (%)

Notes on Discrepancy

China

27.79%

30.80%

FTSE tends to have a slightly higher China weight.

India

19.43%

22.15%

FTSE tends to have a higher India weight.

Taiwan

19.72%

20.31%

Weights are broadly similar.

South Korea

9.02%

– (Classified as Developed)

Major point of difference due to classification.

Saudi Arabia

4.16%

4.59%

FTSE tends to have a slightly higher Saudi Arabia weight.

Brazil

~4.55%

~4.60%

Broadly similar, check latest factsheets.

The choice between funds based on these different benchmarks is not merely a passive decision; it represents an implicit active bet on the inclusion or exclusion of significant markets like South Korea and on the varying weights assigned to other key countries. Investors should be aware that these “passive” index choices have material consequences for their portfolio’s geographic and sectoral tilts. Furthermore, both major EM indexes exhibit significant concentration in their top country and sector holdings. For instance, the top three countries (often China, India, and Taiwan) can constitute over 60% of the index weight, and a few sectors like Information Technology and Financials also dominate. This is a critical consideration for investors seeking broad diversification through a single EM fund.

Metric

Value

Number of Constituents

1,206

P/E Ratio (Forward)

11.86 – 11.

P/BV Ratio

1.80 – 1.

Top 5 Country Weights

China (29.57%), India (19.21%), Taiwan (17.08%), South Korea (9.32%), Brazil (4.55%)

Top 5 Sector Weights

Financials (24.72%), Information Technology (21.74%), Consumer Discretionary (13.83%), Communication Services (10.18%), Industrials (6.47%)

Top 3 Holdings

Taiwan Semiconductor Manufacturing Co. Ltd., Tencent Holdings Ltd., Alibaba Group Holding Ltd.

Metric

Value

Number of Stocks

~2,237 – 2,252

P/E Ratio

~14.2x – 14.3x

P/B Ratio

~2.1x

Top 5 Country Weights

China (32.77%), India (22.27%), Taiwan (17.64%), Brazil (4.60%), Saudi Arabia (4.37%)

Top 5 Sector Weights

Technology (25.17%), Financials (24.18%), Consumer Discretionary (12.61%), Industrials (7.73%), Basic Materials (5.50%)

Top 3 Holdings

Taiwan Semiconductor Manufacturing Co Ltd, Tencent Holdings Ltd, Alibaba Group Holding Ltd

5.3. Essential Due Diligence Practices for EM Funds & Companies

Given the higher opacity and inherent risks in emerging markets, rigorous due diligence is paramount.

• Fund Manager Vetting: For actively managed funds, scrutinizing the fund manager’s track record, investment process, and team is crucial. Statistics suggest a large percentage of fund managers underperform broad market benchmarks, underscoring the importance of careful selection. Shockingly, one study found that 17% of nearly 4,000 funds analyzed had red flags related to fund managers’ backgrounds, such as bankruptcies or civil suits, which could indicate character flaws with potentially devastating repercussions for the fund.
• Corporate Governance Due Diligence: This is particularly critical in EMs. It’s not merely a defensive measure against fraud but a key enabler of sustainable value creation. Standard financial due diligence alone may not uncover long-term vulnerabilities stemming from governance deficiencies. Key areas to assess include ownership structures (many EM companies are family-owned or promoter-driven with centralized decision-making and weak board independence), related-party transactions, the company’s governance history, past legal disputes, and the conduct of its promoters or key executives.
• Expense Ratios: Investors should seek funds with lower expense ratios (Total Expense Ratio – TER), as higher fees can significantly erode returns over time, especially in an asset class where returns can be volatile.
• Tax Implications: Investments in EM mutual funds and ETFs are typically subject to capital gains tax, with different rates often applying to short-term versus long-term holdings. Investors should understand the tax implications in their respective jurisdictions.

5.4. The Importance of a Long-Term Horizon & Risk Appetite

Emerging market funds are generally best suited for investors who possess a high tolerance for risk and can commit capital for a long-term investment horizon, often suggested to be eight years or more. Short-term volatility is a common feature of these markets, but the potential rewards associated with their growth stories are typically realized over extended periods. Aligning EM investments with one’s overall risk tolerance and long-term financial goals is crucial to avoid making emotionally driven decisions during inevitable market downturns. The inherent volatility and the extended timeframes required for structural opportunities (like demographic shifts or large-scale infrastructure projects) to mature and translate into investment returns necessitate patience; short-term investors are likely to be unsettled by market swings.

5.5. Asset Allocation Considerations within a Diversified Portfolio

Emerging market equities can serve as a valuable component to complement a diversified global portfolio, owing to their unique risk/reward characteristics and potential diversification benefits. For most individual investors, EM equities typically represent a satellite holding, complementing a CORE allocation to developed market equities. The decision on how much to allocate should consider the investor’s overall portfolio strategy, risk tolerance, and investment horizon.

It’s also worth noting the drivers of capital flows into EMs. Sometimes, capital is “pushed” into emerging markets due to unattractive conditions or perceived overvaluation in developed markets. At other times, capital is “pulled” into EMs by their strong intrinsic fundamentals and growth prospects. While understanding these flows can inform tactical adjustments, the fundamental arguments for EM exposure—long-term growth and diversification—suggest that for many, EM allocation should be a strategic, long-term decision rather than a purely opportunistic one.

Emerging Markets in 2025 & Beyond: Outlook and Key Trends

The landscape for emerging market equities is constantly evolving, shaped by a confluence of macroeconomic trends, geopolitical shifts, and country-specific developments. As of early 2025, the sentiment is one of cautious optimism, with notable opportunities tempered by significant uncertainties.

6.1. Recent Performance Snapshot & Current Sentiment

Emerging market equities generally experienced positive returns in the first quarter of 2025, with some benchmarks outperforming developed markets. This performance was often driven by specific markets such as China, Brazil, and Mexico, which benefited from factors like policy support, AI innovation buzz (China), and commodity tailwinds (Brazil). However, Q1 2025 was also marked by renewed volatility, largely attributed to lingering economic uncertainty and the announcement of U.S. tariffs, which reshaped investor psychology. This led to a pivot towards defensive factors like High-Yield and Value, while Momentum strategies, which had performed well in 2024, saw a retreat.

Interestingly, some of the star performers of 2024, notably India and Taiwan, lagged in Q1 2025. From a sector perspective within EMs, Consumer Discretionary and Communication Services were leaders in Q1, largely benefiting from the rally in Chinese stocks. Conversely, the Information Technology sector was a significant underperformer in EMs during this period, as investors grew wary of a potential slowdown in U.S. technology demand and its Ripple effects. Emerging market manufacturing output showed signs of acceleration in January 2025, possibly due to front-loading of shipments ahead of U.S. tariffs, while services activity softened.

6.2. Key Macro Drivers for 2025

Several interconnected macro drivers are expected to shape the EM investment landscape in 2025:

• Global Growth Dynamics: There is a strong potential for a slowdown in global growth in early 2025. However, many central banks are poised to respond with interest rate cuts, which could pave the way for a recovery in the latter half of the year. Overall emerging market growth was observed to soften at the start of 2025.
• Inflation and Central Bank Policies: Disinflation is generally expected to continue, possibly at a faster pace than previously anticipated in some regions like Europe. Monetary policy easing by major central banks is a key anticipated theme for 2025. However, a critical watchpoint is persistent inflation in the U.S., which could compel the Federal Reserve to maintain a tighter policy stance or even renew tightening, thereby impacting global financial conditions and capital flows to EMs.
• U.S. Trade Policy & Tariffs: This remains a dominant source of uncertainty and a potential significant headwind for emerging markets. Increased tariffs could weaken U.S. demand for goods from trading partners, impacting their GDP. While some EMs, particularly those outside of direct U.S.-China tensions like Mexico and China itself, might be less directly targeted, they could still be affected by secondary macroeconomic changes such as shifts in global supply chains or overall dampened global trade. Conversely, trade diversion resulting from tariffs could benefit certain EM countries that can step in to fill supply gaps.
• Technological Advancements (AI): Artificial Intelligence continues to be viewed as a powerful, long-term productivity enhancer and a significant investment theme globally. Emerging markets, especially in Asia, are seen as offering diversification opportunities for AI-related equity investments. The burgeoning demand for data centers to power AI applications is also creating a related investment trend in energy and infrastructure.
• Energy Transition: The global push towards decarbonization and renewable energy sources is creating sustained demand for specific commodities and technologies. Emerging markets are often key producers of the raw materials essential for green technologies (e.g., copper, lithium, cobalt) and are also significant markets for renewable energy deployment.
• Valuations: At the close of 2024, emerging market equities, as an asset class, appeared to trade at attractive valuation multiples (e.g., forward price-to-earnings ratios) relative to developed markets, particularly the U.S.. This relative value could provide a cushion or an impetus for inflows if growth prospects hold up.

6.3. Regional Spotlights for 2025

The outlook for emerging markets in 2025 is far from uniform, with distinct opportunities and challenges present across different regions.

• Asia:
  • Overall: The near-term economic outlook for the Asia-Pacific region has weakened, primarily due to rising trade tensions. Regional growth is forecast to slow to approximately 3.9% in 2025 from 4.6% in 2024, impacted by lower external demand, a soft technology cycle, and subdued private consumption. Risks are generally tilted to the downside.
  • China: Experienced a rebound in Q1 2025, driven by technology sector advancements (particularly in AI, such as innovations from Deepseek) and renewed policy support, including fiscal stimulus, measures to stabilize the property market, and encouragement for the private sector and internet companies. Valuations remain attractive after several challenging years, and the government is pushing into strategic industries like AI and advanced manufacturing. However, challenges persist, including uneven consumer demand, ongoing trade tensions with the U.S. (tariffs, semiconductor export controls), and the need for consistent policy execution. The real estate sector continues to pose a risk to the broader economy and banking system.
  • India: Maintains a strong long-term structural growth story, underpinned by rising domestic consumption, the “Make in India” manufacturing initiative, and a globally competitive technology services sector. Favorable demographics and its status as a fast-growing major economy are key positives. However, India saw a market pullback in Q1 2025, attributed to elevated valuations after a strong multi-year run, weaker-than-expected Q1 GDP growth and corporate earnings, persistent inflation, some regulatory tightening, and a pre-election slowdown in infrastructure spending. This correction may offer entry opportunities for long-term investors.
  • South Korea: Could benefit from structural economic changes. The government announced increased support for its vital semiconductor industry in response to rising costs and global competition. The key consideration for fund investors remains its differing classification by MSCI (Emerging) and FTSE (Developed).
  • Taiwan: A critical player in the global technology supply chain, particularly for AI infrastructure (e.g., TSMC, Delta Electronics). The market lagged in Q1 2025 due to a broader selloff in global technology stocks and activated market stability mechanisms in response to tariff-related market turmoil.
• Latin America:
  • Overall: Growth projections for Latin America and the Caribbean for 2025 have been revised downwards by institutions like ECLAC (to 2.0%) and the IMF (to 2.0%), citing the impact of U.S. tariffs, a global economic slowdown, deceleration in domestic demand, and lower investment.
  • Brazil: Showed a strong start to Q1 2025, supported by improving fiscal signals from the government and a favorable commodity backdrop (especially for iron ore and soybeans, with strong demand from China). Attractive equity valuations, exposure to agricultural and financial technology trends, and nearing the end of its monetary tightening cycle are positives. However, the outlook remains sensitive to inflation, central bank policy, and political developments. The Brazilian real’s stability is a key watchpoint. Some data indicated a contraction in January 2025 due to weakness in services, price pressures, and high borrowing costs.
  • Mexico: Positioned to benefit from nearshoring trends as companies seek to diversify supply chains away from U.S.-China tensions. USMCA-compliant exports largely dodged U.S. tariffs announced in early 2025, and there was potential for lower tariffs on other exports. Falling domestic interest rates also provided a boost. Political risks remain a consideration.
• EMEA (Europe, Middle East, Africa):
  • Emerging Europe: The EU’s overall growth forecast for 2025 was downgraded due to U.S. tariffs and heightened uncertainty, which will likely impact emerging European economies linked to the bloc. Central Europe had been a relative bright spot earlier in the year.
  • Middle East & Africa: Oil prices experienced downward pressure in early 2025 amid escalating trade tensions and a surprise decision by some OPEC+ producers to boost output. This raised concerns about the pace of economic reforms in oil-producing nations like Saudi Arabia and the UAE.
  • Turkey: The central bank implemented a significant interest rate hike in early 2025 to stabilize markets amidst political turmoil, though Turkish equities still ended April 2025 lower.

Region

Key Growth Driver(s) for 2025

Key Challenge(s) for 2025

Asia

Tech innovation (AI), policy support (China), domestic demand (India)

US trade tensions, soft tech cycle, uneven consumer demand

Latin America

Commodity demand, nearshoring (Mexico), improving fiscal signals (Brazil)

Global slowdown, US tariffs, inflation, political uncertainty

EMEA

Integration with Europe (CEE), potential for trade diversion benefits

US tariffs, commodity price volatility, geopolitical instability

6.4. Sectoral Focus: Opportunities & Risks in Key EM Sectors for 2025

The outlook for specific sectors within emerging markets presents a mixed picture, with distinct drivers and challenges.

• Technology:
  • Opportunities: Global IT spending is projected for healthy growth in 2025 (around 9.3%), with data center and software segments expected to see double-digit expansion. Worldwide spending on AI is anticipated to grow at a compound annual rate of 29% from 2024 to 2028. EM Asia offers diversification for AI investment themes. The semiconductor industry is forecast for double-digit revenue growth in 2025, largely driven by demand for GenAI chips. China’s strategic push into AI and advanced manufacturing, India’s competitive tech services sector, and Taiwan’s leadership in AI infrastructure are notable EM-specific strengths.
  • Risks: U.S. export controls on advanced semiconductors to China remain a significant hurdle. The IT sector notably underperformed in EMs in Q1 2025, partly due to investor concerns about a potential slowdown in U.S. tech demand. New global tax regulations, including minimum tax requirements and country-by-country reporting, will likely pose compliance challenges for tech companies in 2025. Broader market volatility and the impact of tariffs also present risks.
• Consumer Discretionary & Staples:
  • Opportunities: The primary long-term driver is the expanding middle class in emerging markets, which fuels demand for a wide array of goods and services. Rising domestic consumption in India and policy support for domestic consumption in China are key regional tailwinds. The Consumer Discretionary sector was a top performer in EMs in Q1 2025, largely benefiting from the rally in Chinese stocks. Specific EM consumer-related companies, particularly in China, showed strong performance in Q1 2025, often driven by attractive dividend yields or robust sales growth.
  • Risks: Consumer demand in China remains somewhat uneven. Private consumption across the broader Asia-Pacific region was described as subdued heading into 2025. U.S. consumer spending showed signs of weakness in early 2025 , and global consumer spending growth is generally expected to slow or remain low in 2025. U.S. tariffs on consumer goods could dampen demand. Some analysts (e.g., Neuberger Berman) downgraded the Consumer Discretionary sector to underweight in early 2025 due to these concerns.
• Financials:
  • Opportunities: The growth of financial technology (fintech) in regions like Brazil presents exciting prospects. Digital banking is transforming financial services in many EMs, with examples like Nubank in Brazil highlighting this trend. If central banks in EMs begin easing cycles (as some, like Brazil, are nearing), this could benefit financials, similar to potential scenarios in developed markets. Some reports suggest that EM banks, in general, reflect underlying financial stability.
  • Risks: Global financial stability risks were seen as having increased in early 2025 due to tighter global financial conditions and heightened economic and trade uncertainty. This includes concerns about high valuations in some key markets, the potential for strain on highly leveraged financial institutions, and debt sustainability challenges for some sovereigns. Geopolitical events can significantly raise sovereign risk premiums, especially in EMs with limited fiscal space or international reserve buffers. The ongoing difficulties in China’s real estate sector continue to pose a risk of contagion to its banking system. Reflecting some of these concerns, Neuberger Berman downgraded the Financials sector to underweight in its Q2 2025 outlook.
• Commodities/Materials & Energy:
  • Opportunities: Emerging markets are leading producers of a wide range of essential commodities. The global energy transition is creating sustained demand for specific materials (e.g., copper, lithium, nickel) that are predominantly sourced from EMs. A supportive commodity price backdrop benefited countries like Brazil in early 2025. A potential weakening of the U.S. dollar, perhaps due to U.S. policy uncertainty, could benefit EM commodity exporters as commodities are often priced in USD. Ongoing infrastructure development in EMs also fuels demand for materials. Some strategists upgraded the Energy sector to overweight in early 2025.
  • Risks: Commodity prices were forecast by some (e.g., World Bank) to fall sharply overall in 2025 due to weakening global economic growth weighing on demand, with oil prices expected to exert significant downward pressure. Risks to these price projections were seen as tilted to the downside; a sharper-than-expected global growth slowdown could further depress demand, especially for industrial commodities. However, geopolitical tensions and extreme weather events represent upside risks to commodity prices. Tariffs could subdue global demand and negatively affect commodity prices generally. Specific industries like auto parts manufacturers face dual uncertainty from tariffs and shifts in U.S. policy regarding electric vehicles.
• Industrials:
  • Opportunities: Massive infrastructure investment needs across emerging markets provide a long-term demand driver for industrial goods and services. A global shift from services to manufacturing, partly driven by investments in renewable energy and AI infrastructure, could benefit the sector. Trends like onshoring, nearshoring, and the need to modernize aging infrastructure in many countries also create demand. Stimulus measures in regions like Europe and China could help rejuvenate global industrial activity, albeit potentially at a slower pace.
  • Risks: The Industrials sector detracted from EM relative performance in Q1 2025. U.S. tariffs on industrial goods are a direct threat. While global manufacturing output growth accelerated in January 2025, this was partly attributed to front-loading of purchases ahead of anticipated tariff implementations, suggesting underlying demand might be weaker.
• Healthcare:
  • Opportunities: The expanding middle class in emerging markets is leading to increased demand for healthcare services and products. Radical innovations in areas like AI-driven diagnostics, new drug therapies (e.g., GLP-1s), and robotic surgery are transforming the prospects of the healthcare sector globally, with EMs participating in this trend.
  • Risks: Healthcare leaders globally report that managing cyber threats, rising labor costs, and third-party risks are top concerns for 2025. The sector also faces ongoing challenges from regulatory scrutiny, drug pricing pressures, the impact of patent expirations (“patent cliffs”), talent shortages, and the health-related impacts of climate change. The rise of non-traditional players, such as large retail organizations and pharmacy benefit managers (PBMs), is disrupting traditional market dynamics, particularly in pricing and distribution.

A key theme for the 2025 outlook is the potential for a “Great Divergence” within emerging markets. Performance and prospects are likely to vary significantly not just between EMs and developed markets, but also among different EM regions, countries, and sectors. This makes broad, passive EM index investing potentially less effective than more targeted or active investment approaches that can capitalize on these divergences. U.S. policy, both trade-related (tariffs) and monetary (Federal Reserve actions), remains a dominant external factor influencing EM outlooks across the board, highlighting a persistent vulnerability for these markets. Amidst these complexities, two powerful, long-term structural themes – Artificial Intelligence and the Energy Transition – are expected to be significant engines of future growth, with many related investment opportunities residing in or heavily involving emerging markets.

Balancing Opportunity and Prudence in Emerging Market Investing

Emerging market equity funds undeniably offer a compelling, yet intricate, investment proposition. They present the allure of tapping into the dynamism of youthful economies, expanding middle classes, and transformative infrastructure development. This potential for significant growth is, however, intrinsically linked with substantial risks, including political volatility, economic instability, and market-specific uncertainties that demand careful navigation.

The journey of an emerging market is, by definition, one of evolution. Countries continually develop, with some graduating to developed status while new economies enter the emerging landscape. This dynamic nature of the EM universe itself requires investors and index providers alike to remain vigilant and adaptive.

• Understand Your Own Profile: The cornerstone of any EM investment decision is a thorough self-assessment. These investments are generally suitable for individuals with a robust tolerance for risk, clear long-term investment goals (often 8+ years), and the temperament to withstand market volatility. They are not appropriate for short-term speculation or for those who prioritize capital preservation above all else.
• Diversification – A Double-Edged Sword: While EM funds can enhance the diversification of a broader global portfolio, investors must be acutely aware of potential concentration risks within the EM funds themselves. Many broad EM indexes are heavily weighted towards a few large countries (like China) and specific sectors. Utilizing different fund types, such as regional or ex-country funds (e.g., EM ex-China), can be a strategy to manage this internal concentration.
• Due Diligence is Paramount: The unique characteristics of emerging markets, including greater opacity and governance challenges, make thorough due diligence non-negotiable. This involves researching fund options meticulously, understanding their investment strategies, underlying benchmarks, fee structures (TERs), and the track record and integrity of fund managers, especially for active funds. For those considering direct investments in EM companies, scrutiny of corporate governance practices is of utmost importance.
• The Active vs. Passive Debate in EMs: Given the documented market inefficiencies, information asymmetry, and the potential for significant performance divergence within emerging markets, the case for active management may be stronger here than in more efficient developed markets. While passive ETFs offer cost-effectiveness and simplicity, skilled active managers may have greater potential to add value (alpha) through superior stock selection and nuanced risk management in these less-covered and often mispriced markets.
• Stay Informed and Patient: The emerging market landscape is in constant flux. Investors should endeavor to stay informed about global macroeconomic trends, geopolitical developments, U.S. policy shifts, and specific regional and country dynamics that can impact their holdings. Patience is a critical virtue, necessary to ride out inevitable periods of volatility and allow the long-term growth narratives of these economies to unfold.
• Consider Professional Advice: Navigating the complexities of emerging market investing, from selecting appropriate funds to determining suitable allocation levels, can be daunting. For many investors, seeking guidance from a qualified financial advisor can provide valuable perspective and help align EM investments with their overall financial plan.

In essence, emerging market equity funds can be a rewarding component of a well-diversified, long-term investment strategy for investors who fully comprehend and can comfortably bear the associated risks. A judicious approach, characterized by careful selection, continuous monitoring, and unwavering patience, is essential to harness the significant growth potential these dynamic markets offer.