Emerged: The structural re-rating of Emerging Markets

Key takeaways:

• In the last 25 years, emerging markets (EMs) collectively have meaningfully reduced their macroeconomic and financial market vulnerabilities, through stronger policy frameworks, improved external balances, and deeper domestic financial markets. EM vulnerabilities today are more likely to be idiosyncratic and localized.
• These structural improvements have, over time, prompted a gradual positive re-rating of EM assets, starting with sovereign fixed income and FX markets many years ago, and more recently observed in equities, where in 2025 EMs outperformed DMs.
• EM equities potentially offer compelling upside opportunities relative to DM equities benefitting from several secular investment themes that have been driving equity markets recently, including AI investment, the green transition, soaring demand for certain industrial and precious metals, and rising spending power in EMs, that all likely have room to run. 
• EM equities are also likely to benefit from more cyclical factors such as having larger fiscal head room, a more independent monetary easing cycle, attractive valuations, better earnings growth outlooks and lower correlations relative to DMs.
• Portfolio allocations to EMs deserve another look. EM equity market capitalization relative to global equities peaked post-GFC in October 2010 at around 13% and was 10.2% at the end of 2025. Emerging markets and developing economies’ share of global GDP is estimated by the IMF at 41% (2025) and expected to rise to 44% (2030).
• There is considerable variation among EMs, with distinct macro and market drivers. EMs may lend themselves well to investors seeking selective, granular portfolio exposures.

Points of differentiation:

• This paper offers a holistic narrative of the evolution of EM financial assets in terms of their risk-return profile, putting it in the context of EM macroeconomic and structural changes, and juxtaposing it besides that of DMs.
• While EMs’ improved resilience is widely accepted, their potential for risk-adjusted returns may still be underappreciated by investors, which this paper highlights.

What does our research mean for investors?

This FTSE Russell research enables investors to shift their perspective from thinking of EM assets as “less risky” than before to thinking of them as essential components of a global portfolio given their potential for risk-adjusted returns.