Andrew Ness, Portfolio Manager at Templeton Emerging Markets Investment Trust, explains why investors may need to rethink their assumptions about emerging markets as the asset class evolves beyond the stereotypes that have defined it for much of the past decade.
For more than a decade, emerging markets (EM) have lived under the shadow of two persistent narratives. The first is that innovation comes from the developed world and only diffuses outward.
The second is that EM returns are hostage to currency swings, global rate cycles, and episodic political disruption. Yet the underlying composition of the asset class has changed significantly.
A closer look at the fundamental drivers of today’s emerging markets shows a landscape that has shifted from commodity sensitivity to world-class businesses. Earnings growth is accelerating across regions.
Valuations remain deeply discounted. Capital flows are only beginning to recover from a historic period of under allocation.
The case for emerging markets cannot be reduced to a single catalyst. It sits at the intersection of innovation leadership, attractive pricing, and a structural supply of future potential inflows.
Inflation had already eased across many EM economies while central banks in the United States, Canada, and Europe were still deciding when to act. Currencies were steadier, rate cuts were already underway, and a softer dollar only amplified the advantages.
But the real story is not what happened in the rearview mirror, it is what these conditions reveal about where the next leg of global growth may be forming.
Innovation is redefining the EM opportunity set
The most overlooked story in emerging markets investing is the rise of innovation as a structural driver. Asia now accounts for more than half of global patent grants.
The semiconductor supply chain is dominated by emerging market firms such as Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, and SK Hynix, companies that sit at the centre of the technologies powering artificial intelligence, cloud computing, and advanced electronics.
The electric vehicle and clean energy sectors show a similar pattern. China and Korea lead the world in EV battery production. Companies like BYD continue to scale rapidly across Europe, moving from niche competitors to mainstream manufacturers with global footprints.
Digital infrastructure tells another part of the story. India’s biometric identification system, which covers roughly 95 percent of the population, has enabled seamless access to bank accounts, payments, and brokerage platforms.
This single development has transformed the country’s savings and investment behaviour.
Other regions across Latin America and Asia are moving along similar paths. Companies like Cognizant, though listed in the United States, derive much of their talent and operational strength from India. These types of firms can fall outside traditional EM indices, yet they represent the global, services-oriented businesses driven by highly skilled emerging market workers.
This transition matters because it broadens the base of EM earnings beyond commodities. Profitability is now driven by domestic consumption and world-class global businesses.
The result is a stronger, more resilient foundation that behaves differently than the emerging markets of 10 or 15 years ago.
The valuation gap that has room to close
Even after a strong year, EM equities remain deeply discounted relative to developed markets, in particular the US. On a price-to-earnings basis, emerging markets trade at roughly a 38 to 39 percent discount to the S&P 500.
The 10-year average sits closer to 29 percent. Based on 2026 earnings expectations, the gap widens to more than 40 percent.
Currency dynamics also look more favourable than they have in years. The US dollar has been range-bound, which can reduce the currency impact on EM returns. Meanwhile, emerging markets have been cutting interest rates more slowly than developed economies, a trend that supports currency stability and preserves real yield advantages.
The valuation argument is straightforward. Emerging markets investing offers higher earnings growth at a lower price. If the earnings picture holds and policy signals remain supportive, the discount has room to compress.
A structural allocation gap that could drive the next leg
Fifteen years ago, global investors held roughly 13.5 percent of their equity exposure in EM. Today, that figure is near 5 percent. The 10-year average sits around 6.7 percent. A return to even that midpoint would require hundreds of billions of dollars in inflows.
Many investors underestimate how narrow their EM exposure actually is when they rely on global mandates. Global equity portfolios might hold EM megacaps like TSMC.
What might be missing are the e-commerce platforms selling to young, educated emerging consumers in large, populous countries like China, India, Brazil, and Indonesia; the renewable energy supply chain leaders across China helping to decarbonize the world; or opportunities in the Middle East, where wealthy economies are meeting structural reforms.
In 2026, the alignment of key forces is clear. Earnings expectations outpace those of developed markets, valuations remain discounted, currency conditions are stable, policy environments across EM continue to support growth and capital flows are slowly stabilising.
The backdrop is changing in ways that are hard to ignore. We believe the stars are starting to align and emerging markets are in compelling position to deliver multi-year periods of strong returns.
The question for investors is whether they recognise how different today’s EM looks from the version shaped by the past decade. Growth drivers are broader. Earnings are supported by the rise of domestic consumption and industries with global relevance.
Policy cycles are converging in favourable ways. And the world’s largest asset allocators remain significantly underweight.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: emerging markets, wengang-zhai-81-HeiYXgPA-unsplash
