Emerging markets have shifted from commodity exporters and state-owned banks to technology export businesses.alexsl/iStockPhoto / Getty Images
Emerging markets, which have lagged their developed world peers since 2020, have come roaring back to life.
The MSCI Emerging Markets Index gained 42.8 per cent, in U.S. dollar terms, for the year ending Jan. 31, versus 19.6 per cent for the MSCI World Index and 16.4 per cent for the S&P 500 Index.
Some fund managers wager that emerging markets can still outperform this year – and potentially longer – with tailwinds from China, Taiwan and South Korea.
“We remain positive on emerging markets, even if we get a bit of a pullback, given the extreme outperformance in January,” says Matthew Strauss, portfolio manager and lead for global equities at CI Global Asset Management in Toronto, referring to the MSCI Emerging Markets Index’s 9 per cent gain in the first month of the year.
“This is not your typical one-year on, one-year off cycle,” says Mr. Strauss, who oversees CI Emerging Markets Fund. “There are very good fundamental reasons for the rally to continue.”
Using Bloomberg LP data, the recent consensus estimate for forward earnings-per-share growth is about 19 per cent for emerging markets versus almost 14 per cent for developed markets and 15 per cent for the U.S., he says.
The last emerging-markets supercycle, which occurred from 2000 to 2010, was driven by China’s rapid industrialization and a commodity bull market. Since then, that outperformance has been sporadic.
Emerging markets have lagged since 2020 after China’s property bubble burst and triggered an economic slowdown, while the Chinese government’s crackdown on its technology giants made foreign investors wonder if China was investable.
But developing markets rebounded in 2025 as investors diversified away from the U.S. market in search of better valuations. That coincided with a rally in commodity and Asian technology stocks, as well as a weakening U.S. dollar and falling U.S. interest rates.
The Chinese market also got a boost early last year when startup DeepSeek rattled the global tech industry with its low-cost AI model that challenged San Francisco-based OpenAI’s ChatGPT. It was a “warning shot” about how advanced China is, Mr. Strauss says.
Although U.S. President Donald Trump’s harsh “Liberation Day” tariffs rattled markets last April, it was a “big relief” that the ensuing trade agreements were less onerous, he adds.
Global investors continuing to diversify beyond the U.S. market and a weakening U.S. dollar can help emerging markets keep rallying this year, he says.
There are now investment opportunities in China’s “new economy,” in areas such as clean energy, robotics, cloud services and AI applications, Mr. Strauss says.
His China holdings include battery maker Contemporary Amperex Technology Co. Ltd. and Alibaba Group Holding Ltd. BABA-N because of its cloud service and AI spending.
In Taiwan, his fund owns contract chipmaker Taiwan Semiconductor Manufacturing Co. Ltd. TSM-N and chip designer MediaTek Inc., which has partnered with Alphabet Inc.’s GOOG-Q Google to produce its next-generation tensor processing units used for AI.
Other holdings include South Korea-based SK Hynix Inc. and Samsung Electronics Co. Ltd., which make high-bandwidth memory chips that are in hot demand for AI data centres.
‘New growth engine’
Regina Chi, vice-president and portfolio manager at AGF Investments Inc. in Toronto, says it’s still a “very exciting time for emerging markets.”
“Given that Chinese equities make up 25 per cent of the index, they also need to participate in the rally for emerging markets to outperform,” says Ms. Chi, who manages AGF Emerging Markets Fund and AGF China Focus Class fund.
The outlook for China’s equity market has improved, given the country’s trade agreement with the U.S. last fall and a recent decision by Chinese President Xi Jinping to embrace private firms again as a driver of innovation to spur economic growth, she says.
“China now has a new growth engine,” Ms. Chi says, and will likely focus on AI and areas such as energy storage, electric vehicles, space technology and humanoid robots.
Her emerging markets fund focuses on China’s A shares. It owns Shenzhen Inovance Technology Co. Ltd., a leader in advanced automation and industrial solutions, and NARI Technology Co. Ltd., a supplier of smart grid and power automation products.
She also likes names such as Taiwan Semiconductor Manufacturing, SK Hynix, Samsung Electronics and Hanwha Aerospace Co. Ltd., a South Korean defence company.
Ms. Chi is also bullish on commodities, which benefit from a weak U.S. dollar. Her fund owns U.S.-listed Southern Copper Corp. SCCO-N, which operates a copper mine in Peru.
She also expects the gold price to remain strong because of central bank purchases to diversify from U.S. Treasuries, while Tether, the issuer of the world’s largest stablecoin, is stockpiling the metal.
The Indian market has been a “notable underperformer” amid trade tensions with the U.S., but that cloud has been lifted following a recent interim trade deal, Ms. Chi adds.
Shifting universe
Wen Quan Cheong, a portfolio manager with Mawer Investment Management Ltd. in Singapore, also says emerging markets have a higher-than-average chance to outperform this year.
“Emerging markets today are not the same asset class as they were even a decade ago,” says Mr. Cheong, co-manager of Mawer Emerging Markets Equity Fund.
“The universe has shifted from commodity exporters and state-owned banks toward globally critical technology export businesses, rising middle-class consumption and dominant local platforms,” he says. “An example of the latter is Rasan Information Technology, a Saudi digital platform that aggregates and distributes insurance.”
Emerging market equities are also trading attractively, at about 14.7 times forward earnings with strong growth, versus 24 times for the S&P 500 with slightly lower growth, he notes.
Mr. Cheong, who is bullish on AI over the long term, takes a “picks and shovels” approach to stocks for that theme (referring to the California gold rush, when merchants selling tools often made more money than miners).
The Mawer fund also holds SK Hynix and Taiwan Semiconductor Manufacturing. The latter has a “near-monopoly in manufacturing the most advanced chips used today in Al,” he says.
Taiwan-based King Yuan Electronics Co. Ltd., which tests semiconductor chips and has a near-monopoly in testing Nvidia Corp.’s AI graphics processing units, is also in the fund, he adds.
Another theme he’s playing is the “China plus one” strategy, in which firms are diversifying their supply chains by adding manufacturing to other developing countries.
“We have identified companies, such as engineering firm Acter Group, which is providing services to reconfigure the supply chain,” he says.