Where to invest in emerging markets in the second half of 2026?
9 JUL, 2026
Emerging markets are shedding their old reputation for fragility, and asset managers are increasingly treating that shift as structural rather than cyclical. A weaker dollar, resilient corporate fundamentals, and the world's re-acceleration around artificial intelligence and energy security are converging on a single asset class that, for much of the last two decades, was treated as a satellite allocation rather than a core one.
From income-generating equities to AI-linked supply chains, and from selectively trimmed corporate credit to a broader debate about what "emerging" even means anymore, a fairly precise picture is forming of where managers see the opportunity – and where they are turning more cautious.
Where to invest in emerging markets in 2026: the map of convictions
| Segment | Motivation |
|---|---|
| EM equities, income bias | Over half of EM companies now yield above 3%; ~85% pay dividends, more than in developed markets since 2010 (Aberdeen Investments) |
| EM equities, structural re-rating | Stronger fiscal positions, more credible central banks, deeper local capital markets; the real risk is being underweight, not overweight (Vontobel) |
| EM equities linked to AI infrastructure | Taiwan, South Korea and China sit at the centre of the semiconductor and hardware supply chain behind hyperscaler capex (Vontobel, Invesco) |
| Broad EM exposure vs. dollar weakness | Continued view of an overvalued dollar favours non-US assets, EM in particular (Invesco) |
| EM corporate credit | High-yield telecoms and utilities still cheap vs. developed-market peers, but exposure being trimmed as better opportunities appear elsewhere (Wellington Management) |
| IG EM sovereign debt | Considered unappealing at current valuations (Wellington Management) |
Source: own elaboration based on Wellington Management, Aberdeen Investments, Vontobel, Capital Group and Invesco (Strategy & Insights, July 2026).
Income is no longer a developed-market story
The idea that emerging markets are a growth trade and developed markets are an income trade is, according to Matt Williams, Senior Investment Director at Aberdeen Investments, increasingly out of date. Dividend-paying companies have become the norm rather than the exception: since 2010, the share of EM companies paying dividends – now around 85% – has often exceeded that of developed-market peers, and more than half of EM companies currently offer a dividend yield above 3%.
Crucially, this income is not confined to the traditional defensive sectors. Dividend opportunities now span financials, materials, energy and technology, and geographically extend well beyond Asia into Latin America, the Middle East and Eastern Europe. Nor does income come at the expense of growth: EM dividends have compounded at close to 12% annually since the early 2000s, outpacing developed markets, as improving corporate governance and stronger balance sheets feed through into higher payout ratios. Over the past two decades, the capitalisation of dividends has accounted for roughly half of total EM equity returns – a structural, rather than cyclical, contributor to performance.
Williams also points to the asset class's resilience: EM equities rose 34% in 2025 and were up around 15% year-to-date through April 2026, even against a backdrop of geopolitical uncertainty, while the asset class continues to trade at a roughly 40% discount to the S&P 500.
The real risk is being underweight, not overweight
Thomas Schaffner, Portfolio Manager at Vontobel, frames the shift in similar terms but from a different angle: emerging markets, in his view, have become structurally stronger and more resilient to external shocks. Fiscal positions have strengthened, central banks have gained credibility, corporate governance has improved and domestic capital markets have deepened. Growth drivers have diversified too, with artificial intelligence and innovation now sitting alongside domestic demand and intra-EM trade.
Since the start of 2025, EM equities have outperformed the MSCI World by close to 37%, despite tariff disruption and the prolonged Middle East conflict – with volatility contained, capital flight limited and currencies broadly stable even through episodes of dollar strength. For Schaffner, this is not a temporary anomaly but a structural shift: "the biggest risk for investors today is no longer excessive exposure to emerging markets, but the historically low allocation that portfolios still carry."
Vontobel's own approach centres on companies where a positive inflection in returns on invested capital (ROIC) is not yet priced in, filtered through three layers: a minimum weighted-average ROIC percentile of 75% across the portfolio, competitive positioning within the top two quartiles of each sector, and valuation opportunities where fundamental improvement has not yet been reflected in price – all subject to minimum ESG standards. Thematically, the firm highlights three structural growth areas within EM: AI infrastructure, where Taiwan, South Korea and China anchor the semiconductor and hardware supply chains behind hyperscaler capex; energy security, where higher and more volatile fossil-fuel prices are accelerating investment in electrification, renewables and critical materials; and corporate governance reform across Asia, which is beginning to translate into higher dividends and buybacks.
Broader access has not meant equal access
Jeremy Cunningham, Fixed Income Investment Director at Capital Group, draws a parallel with football's expanded 48-team World Cup format to make a point about how far – and how unevenly – emerging capital markets have broadened. The MSCI Emerging Markets equity index now covers 24 countries, up from an original 10, and its share of global market capitalisation has more than doubled since 2000; local-currency EM debt markets have deepened significantly over the past decade, and dollar-denominated EM sovereign debt has grown as new issuers have joined more established names.
But broader access has not translated into equal treatment. Many EM economies still borrow in dollars at a meaningfully higher cost than developed-market peers, with less liquidity and greater dependence on foreign flows; even deeper local-currency markets still face operational and transparency constraints. This asymmetry extends beyond pricing – many EM economies now show stronger fundamentals than developed markets, with faster growth, lower debt-to-GDP ratios and younger workforces, yet continue to be penalised in how global markets treat them. EM equities still trade at a significant discount to the US on forward earnings, one of the widest valuation gaps in two decades, even as EM corporate credit quality has been on a consistent upward trajectory.
Cunningham argues that old "emerging" labels increasingly say little about the underlying strength of an economy or the quality of its investment opportunities: emerging and developing economies now represent close to half of global GDP, up from around 25% at the start of the century. His conclusions for investors: past strength says nothing about future prospects; a broader investable universe raises, rather than lowers, the cost of complacency, since dispersion between winners and losers within the same sector or region has widened; and genuine diversification comes from understanding the structure of an economy or business – what drives its growth, how policy is managed, where external vulnerabilities are concentrated – rather than from simply spreading exposure across a map.
Selective, not sweeping, credit exposure
Not every part of the EM narrative is turning more constructive. Campe Goodman and Rob Burn, Fixed Income Portfolio Managers at Wellington Management, note that high-yielding EM corporate bonds – a favourite sector for several years – still hold some appeal: telecoms and utilities with solid balance sheets continue to trade at a discount to their developed-market counterparts. But with more compelling opportunities emerging elsewhere, Wellington sees value in selectively reducing EM corporate exposure, and views investment-grade EM sovereign debt as unappealing at current levels – a reminder that conviction in EM equities does not automatically extend to every corner of EM credit.
A macro backdrop that favours the asset class
At the macro level, Brian Levitt, Global Chief Market Strategist at Invesco, expects the global economy to regain traction in the second half of 2026, contingent on the normalisation of energy flows through the Strait of Hormuz. Invesco's Strategy & Insights team highlights five themes for the period: market resilience, dollar weakness, emerging markets, artificial intelligence and alternative sources of income and diversification.
A full reopening of the Strait would likely trigger a cyclical rebound led by emerging markets and Europe, while continued dollar depreciation – still, in the firm's view, one of the more overvalued currencies on conventional metrics – favours non-US equities generally and emerging markets in particular. Within AI, Invesco continues to prefer semiconductor and hardware names over software, echoing Vontobel's thematic positioning, while private credit and real assets are flagged as complementary sources of income and diversification as inflation settles above pre-pandemic levels in several developed economies.
Disclaimer: This article is for informational purposes only and does not constitute financial, tax or legal advice, nor an offer to buy or sell financial instruments. The opinions expressed reflect the assessments of Banor, PIMCO, Amundi, DPAM and Indosuez Wealth Management at the date of publication of their respective documents and are subject to change without notice. Past performance is not a guarantee of future results. Investing in bonds involves risks, including interest rate risk, credit risk, issuer risk, liquidity risk and exchange risk for instruments denominated in foreign currency.
