Hidden GEMs: The bull case for emerging markets just got stronger

Improving corporate earnings, resilient economies, and a changing global investment landscape are creating a compelling backdrop for emerging market assets.

Emerging markets (EM) are entering the second half of 2026 with renewed momentum as improving corporate earnings, resilient economic fundamentals and increasing policy flexibility reinforce the investment case across equities, corporate debt, currencies and sovereign bonds.

Ahead of the second-quarter earnings season, companies across the MSCI Emerging Markets Index are showing strong earnings momentum, with Korea recording the largest earnings per share (EPS) upgrades among major emerging markets, driven by its exposure to the memory and AI-server supply chains. Together with improving earnings revisions across the broader EM universe, this strengthens the case for EM equities and corporate debt, while falling inflation and attractive real yields provide a supportive backdrop for debt and currencies.

Varun Laijawalla, Co-Portfolio Manager, Emerging Markets Equity: "Emerging market equities are finally being validated by fundamentals rather than simply benefitting from investor optimism. We believe this is a genuine inflection point for emerging market equities.”

“What is particularly encouraging is that earnings growth is becoming broader and more durable. While North Asia continues to benefit from structural demand tied to artificial intelligence, earnings momentum is increasingly extending beyond technology and across the wider emerging market universe. Latin America and EMEA are contributing through a combination of commodity strength and improving domestic fundamentals, while record-low EM inflation and still-elevated real interest rates provide both operating leverage and policy flexibility. For active equity investors, that creates a much richer opportunity set than we've seen for several years."

Today's emerging market equity universe looks fundamentally different from the asset class investors remember from a decade ago.

Laijawalla: "Around 40% of the index is now represented by technology and advanced manufacturing businesses rather than the state-owned commodity and utility companies that once dominated. Yet many of these companies continue to trade at meaningful discounts to their developed market peers despite delivering superior earnings growth."

Beyond equities, falling inflation, attractive real yields and improving policy credibility are supporting a more favourable backdrop for emerging market currencies and sovereign debt.

Thys Louw, Portfolio Manager, Emerging Market Sovereign & FX: "Emerging markets today are fundamentally more resilient than in previous cycles. Structurally, inflation remains well-behaved across much of the emerging world, real interest rates remain attractive, and many countries have rebuilt policy credibility. With strong structural growth, lower external vulnerabilities and still-conservative monetary policy, EM policymakers have more policy room than in previous periods of global uncertainty."

While geopolitical risks and swings in US policy remain important considerations, many investors believe the long-term case for emerging markets is becoming ever more compelling.

Louw: "The structural drivers are more important than the cyclical noise. Investors are increasingly recognising that many emerging economies are entering this period from a position of relative strength, with stronger external balances and more orthodox policy frameworks than in the past. Behind the geopolitical noise, we are also seeing major domestic political and policy changes in emerging markets. Countries such as Argentina, Chile, Colombia, Hungary, Nigeria and Peru have all held elections over the past few years in which voters backed more orthodox reform agendas, further supporting a positive sovereign rating trajectory across EM."

The improving backdrop is also evident within emerging market corporate credit, where company fundamentals have remained resilient despite recent market volatility.

Alan Siow, Co-Head of Emerging Market Corporate Debt: "The quality of the emerging market corporate universe has improved materially over the past decade. Companies have generally entered this period with stronger balance sheets and more conservative financing structures, which has enhanced their ability to navigate volatile market conditions."

The changing environment also heightens the importance of active security selection as the cycle evolves.

Siow: "Credit markets are increasingly differentiating between issuers with strong fundamentals and those facing structural challenges. That environment creates opportunities for active investors who can identify resilient businesses while avoiding areas where policy uncertainty or refinancing risks remain elevated.”

“As market expectations swing from a dovish to a more hawkish view on rates, emerging market corporate issuers continue to benefit from diversified sources of funding. The ability to access domestic funding markets that have become deeper and more developed over time is a key source of resilience.”

Taken together, improving earnings, resilient economies and stronger corporate and sovereign fundamentals suggest the investment case for emerging markets is becoming increasingly difficult to ignore. The bull case is no longer driven primarily by valuations or shifts in the US dollar, but by increasingly robust underlying fundamentals.