GAM: Emerging markets outperformance – just the beginning
21 JAN, 2026
By Ygal Sebban, Investment Director, Emerging Markets Equities at GAM
2025 marked the beginning of the emerging markets revival, but it was only the start. Supported by strong secular forces, cyclical tailwinds and powerful thematic drivers, we believe emerging markets stand out as one of the most compelling opportunities for 2026.
The stars are aligned
1. Demographics
Population growth, urbanisation and the rise of the middle class, particularly in India and Southeast Asia, are reshaping consumption patterns. Higher female labour-force participation and rising GDP per capita are driving domestic spending growth—not only in goods, but increasingly in services.
2. Government-led reforms and index evolution
Structural reforms in India and China, including pension-related initiatives, are accelerating domestic demand. At the same time, the MSCI Emerging Markets index has shifted away from industrials and energy towards technology and consumer discretionary sectors, with India, China, Korea and Taiwan now accounting for 75.7% of the index.
3. Credit quality
Eight of the ten largest emerging market sovereigns are now investment grade. Positive real yields enhance returns, making EM fixed income and FX strategies attractive alongside equities.
4. Cyclical tailwinds
The United States faces structural challenges, as markets question the sustainability of public debt, grapple with real estate pressures, and contend with slowing growth outside the AI sector. These forces are likely to push the Federal Reserve towards aggressive rate cuts, driving real interest rates into negative territory. Historically, such environments have led to a weaker US dollar and outperformance of emerging markets. Lower interest rates in both the US and many emerging economies should further support EM equity performance.
5. A constructive view on China
China’s capacity and willingness to support growth remain intact, despite challenges in the property sector and the risk of additional tariffs. The coordinated policy response—spanning monetary, fiscal, real estate and equity market support—is unprecedented and positions domestic equities as a cornerstone of China’s growth strategy. This is reinforced by a multi-year campaign to combat economic involution across a wide range of sectors, aimed at addressing China’s persistent deflationary pressures.
6. The AI tailwind
The artificial intelligence revolution is fundamentally a capital expenditure story. Global investment in AI infrastructure is expected to reach nearly USD 1 trillion by 2030, with much of the spending directed towards semiconductors. Emerging markets are key suppliers, and the semiconductor industry is facing supply constraints that should support further price increases. TSMC, Samsung and SK Hynix dominate global chip production.
An evolving global backdrop
Higher-than-expected US tariffs could weigh on global trade and slow growth in developed markets, reinforcing the role of emerging markets as a stabilising force in a changing global order. In a world marked by US dollar depreciation and shifting geopolitics, emerging markets offer stronger macroeconomic growth and less strained public finances. Valuations remain attractive: EM equities trade at a 2026 forward P/E of just 14x, a historically low and undervalued level. After years of outflows, investor interest is returning, creating scope for multiple expansion.
The case for rating upgrades
Over the past two decades, emerging markets have undergone a profound transformation. Sector composition has shifted dramatically: once dominated by industrials, materials and energy, EM indices now resemble developed markets, with technology, financials and consumer discretionary sectors taking centre stage. These sectors now represent 62% of EM indices, compared with 54% of the MSCI World. The 27% weighting in technology is now comparable to that of developed markets, reflecting the rise of high value-added industries.
Global leaders in semiconductors, memory and batteries are now based in Asia—Taiwan, Korea and beyond—placing emerging markets at the heart of structural growth themes such as artificial intelligence and the energy transition.
This evolution highlights a key point: emerging markets are no longer the cyclical, commodity-driven economies of the past. They are stronger, more diversified and increasingly investment grade. In a world of scarce global growth, countries capable of delivering sustainable expansion should command a premium, not a discount. The persistent valuation gap between emerging and developed markets is therefore unjustified and, in our view, set to narrow meaningfully. Fundamentals now rival those of developed markets while offering superior growth prospects, making a compelling case for a re-rating of emerging market valuations.
