Emerging outperformance
The case for emerging markets is growing stronger. After more than a decade of poor performance, last year the combination of sound fundamentals including good economic management and growth, a weaker US dollar and historically low valuations combined to finally turn the tide. This change in momentum has carried through into this year and looks set to remain. After several false dawns in recent years, and while accepting country and stock selection remain key, the stage is set in general for a gradual reappraisal of their investment merits and the portfolios have been adding to exposure accordingly.
Improving fundamentals and sentiment
Regular readers are aware of our concerns about the valuations afforded the larger US technology companies. Huge amounts of cashflow are being diverted into Artificial Intelligence and its infrastructure and yet we remain cautious as to whether the returns will warrant such investment. This diversion of cashflow increases the companies’ risk profile even before we know whether it will be successful. The prospect of hedging via crossholdings between the key companies suggest chief executives are all too aware of the risks. These are very good companies, but valuations still matter if history remains a guide – and there is no reason to believe things are different this time.
As such, within our portfolios’ underweighting of equities overall relative to their respective benchmarks (for reasons highlighted in previous pieces), we remain underweight the US in favour of better value markets such as the UK and Europe more generally. And if we are right about the prospect of stagflation, this portfolio positioning will further benefit from the good quality ‘value’ stocks which populate these markets given these businesses normally do well in such an environment. The increase in exposure to emerging markets over the last year runs the same vein of seeking better value opportunities, while complementing the portfolios’ existing exposure via various investment trusts.
Yet, the stand-alone case for this diverse range of countries and stock markets is increasingly worthy of mention. In general, an increasingly sizeable and affluent middle class, young and educated populations, rising consumption served by increasingly sophisticated domestic markets, together with good economic growth, all contribute to the general tailwinds that are oft quoted as reasons to be positive. The view a generation ago that emerging markets were mostly commodity-plays geared into the swings in global growth are giving way to a much more nuanced appreciation of the structural reforms undertaken including digitalisation, energy and infrastructure investment.
Of particular note has been the pursuit of sensible economic policies in recent years. Developing countries were quicker to increase interest rates to counter the inflationary effects of the pandemic and, unlike their counterparts elsewhere, tended to avoid quantitative easing where possible. The ‘Alice in Wonderland’ world of distorted policies and asset prices was not tolerated. They were also wary of pursuing aggressive fiscal stimulus packages and tended to consolidate their deficits. Such an approach has laid strong foundations for economic growth – the lessons of the debt crisis of the 1980s and 1990s having been learnt. Economic credibility has largely been restored.
Other positives are evident. Previous columns including ‘Could gold become the new global reserve asset?’ (30 October 2025) suggest the US dollar will continue to weaken, which has usually been a fillip for emerging markets. Their correspondingly stronger currencies help to dampen imported inflation, while providing more headroom for interest rate cuts particularly as their central banks are ahead of the curve. A weaker dollar usually assists commodity prices (where an inverse relationship has tended to hold sway) and this is proving helpful to exporting countries, while also helping to lower many countries’ US$ denominated debt.
And while tariffs remain in the headlines, what has tended to be overlooked is the increase in trade between emerging market countries – which, in turn, has reduced their dependency on exports to the US. Figures from Fidelity suggest the percentage of exports to developed markets fell from c.80% in the 1990s to c.50% today, with the US accounting for c.20%. For example, China’s market is very largely domestic with the MSCI China index showing well over three-quarters of company revenues are sourced from the home market. Such figures suggest emerging market trade and growth is now based on sound foundations, as evidenced last year by strong company profit growth which beat the MSCI World index.
Portfolio holdings
A common holding is Murray International Trust (MYI), which focuses on seeking sound income stocks globally and has a 30% weighting to Asian and emerging market businesses. Meanwhile, Utilico Emerging Markets (UEM) focuses more on infrastructure, utility and similar sectors and is therefore a more defensive holding given returns are more closely correlated to economic growth rates rather than stock market valuations.
Other holdings include Henderson Far East Income (HFEL) which seeks high income and yields 9.5%. Although not a specialist emerging market company, many holdings qualify as such and are considered more defensive when compared to the wider market. Meanwhile, JPMorgan Emerging Markets Dividend Income (JEMI) pursues a similar theme but with less emphasis on yield levels, and this allows more investment flexibility for better total returns over time – which it has admirably achieved.
Beyond the emerging market sector, investors will also recognise that other generalist and specialist investment trusts hold meaningful emerging market exposure. An example of the latter includes Worldwide Healthcare Trust (WWH), where Chinese companies are showing strong innovation – healthcare being one of our favoured themes for 2026.
Disclaimer: The information contained in this article does not constitute investment advice or a personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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