For much of the past 15 years, emerging markets (EM) have been synonymous with disappointment. That perception is increasingly at odds with the structural reality of what the asset class has become.
During this period, an EM allocation has been an afterthought in global portfolio construction. Investors grew accustomed to performance gaps versus developed markets, recurring macro concerns and the perception of higher volatility.
The response from investors (perhaps understandably) was to reduce allocations progressively and concentrate capital in developed markets, particularly US equities. At Carmignac, we argue that investors should now reassess this decision, at a point when the structural foundations of the EM asset class are decisively shifting.
Emerging economies generate roughly 40% of global GDP and close to 70% of incremental global real growth, yet account for just 11% of global equity indices1.
Naomi Waistell and Xavier Hovasse, co-fund managers of Carmignac Portfolio Emergents, said: "This disconnect is not just a statistical anomaly. It is a mispricing of global economic reality. Investors remain anchored to an outdated narrative: EMs as fragile, commodity-dependent and policy-constrained. In reality, they have evolved into diversified, increasingly self-sufficient and innovation-driven economies. Failing to recognise this shift means underexposure to the very regions driving global growth."
From cheap beta to structural growth
The traditional case for EM exposure rested on leveraged participation in global growth cycles: high beta, driven by commodity prices and liquidity conditions. That paradigm has changed.
Today's EM universe is defined by technological leadership, industrial transformation and domestic demand expansion that is self-sustaining rather than dependent on developed market appetite.
"Asia, in particular, sits at the core of the global innovation ecosystem. Taiwan and Korea are indispensable to the semiconductor supply chain. China leads in robotics, EVs and industrial AI. India and Southeast Asia are driving digital adoption at scale," the Carmignac Portfolio Emergents fund managers said.
"Crucially, unlike in developed markets, AI in EM is not just a narrative. It is already embedded in the real economy, driving productivity gains, reducing costs and improving margins."
Asia, in particular, sits at the core of the global innovation ecosystem. Taiwan and Korea are indispensable to the semiconductor supply chain.
Stronger fundamentals, better quality
The improvement in corporate and sovereign quality across the emerging world is one of the least appreciated aspects of this shift. Fiscal positions across many EM economies are more disciplined than developed market counterparts. Central banks have rebuilt credibility: real interest rates are at 20-year highs, reflecting monetary orthodoxy and creating meaningful room to ease as inflation normalises.
At the company level, balance sheets are stronger, return on equity is improving and capital allocation is becoming more disciplined. Dividend yields are increasingly attractive and share buybacks are now at record levels in parts of Asia. Korean equity share cancellations leapt from 4.5 trillion KRW in 2023 to close to 18 trillion in 20252, a clear demonstration that governance reform is translating into shareholder-friendly behaviour.
Waistell and Hovasse said: "The traditional quality discount applied to emerging markets is becoming increasingly outdated. Yet valuations still reflect it."
The MSCI Emerging Markets index trades at around 11.9x forward 2026 earnings, approximately 43% below US equities and 32% below MSCI World. EM equities are forecast to deliver mid-to-high-teens EPS growth in 2026, materially above developed market consensus, yet trade below 1x price-to-earnings-growth ratio against approximately 1.7x for developed markets3.
"This combination of higher growth at lower valuations is rare. And historically, it has been a powerful driver of long-term outperformance," the managers said.
The macro backdrop adds further support. A moderating US dollar reduces balance sheet stress and supports EM valuation multiples. Inflation has normalised across most of the asset class and high real interest rates offer attractive carry. Set against developed markets facing slowing growth, elevated debt and extreme equity market concentration, the relative attractiveness of EM is shifting in a way not yet reflected in most institutional allocations.
The traditional quality discount applied to emerging markets is becoming increasingly outdated. Yet valuations still reflect it.
![[Management Team] [Author] Hovasse Xavier](https://carmignac.imgix.net/uploads/NextImage/0001/18/%5BManagement-Team%5D-%5BAuthor%5D-Hovasse-Xavier-1.png?auto=format%2Ccompress&fit=fill&w=3840)
Xavier HOVASSE
Concentration risk and the case for diversification
Global portfolios today carry significant hidden risks. Heavy exposure to US equities, combined with extreme concentration in a handful of technology mega-caps, creates valuation risk, concentration risk and regime risk, or the risk that the companies which have driven returns for a decade are displaced by a new generation of winners.
EMs offer something structurally different: diversified growth drivers across geographies, sectors and themes, and lower correlation with the dynamics that have driven US equity performance in recent years.
Waistell and Hovasse argue that the next phase of EM performance will not be driven by broad market beta. Dispersion is rising across countries, sectors and individual companies. In this environment, active management, conviction and disciplined stock selection become critical.
"The winners will not be the market. They will be specific companies and themes identified through genuine analytical depth and on-the-ground expertise," they added.
In their view, remaining materially underweight EMs is not a neutral position: "EMs are not just an opportunity. They are a risk if ignored. Investors who remain underweight are effectively making a strong, implicit bet that global growth will continue to be dominated by developed economies, that innovation will remain concentrated in a handful of US companies, and that valuation gaps will persist indefinitely. These are increasingly fragile assumptions."
Global capital remains significantly under allocated to EM relative to their weight in the global economy. As perceptions shift, even a modest reallocation could act as a powerful additional tailwind.
Our emerging market equity team believes the asset class is undergoing a profound transformation: from cyclical to structural, from peripheral to central in global growth, from a source of volatility to a source of diversification and long-term return. The fundamentals are improving, valuations are compelling and the macro environment is shifting in the asset class's favour.
"We are witnessing not just a cyclical rebound, but a structural transformation of the asset class, one that is reshaping its role in global portfolios," Waistell and Hovasse concluded. "The real question is no longer whether investors should allocate to EMs. It is whether they can afford not to."
1Sources: BoAML Research, Bloomberg, 12/01/2026.
2Source: NVIDIA, BofA Global Research estimates, October 2025.
3Sources: MS Research, Bloomberg, 15/04/2026.
Carmignac Portfolio Emergents
Carmignac Portfolio Emergents F USD Acc Hdg
- Recommended minimum investment horizon
- 5 years
- Risk indicator*
- 4/7
- SFDR - Fund Classification**
- Article 9
*Risk Scale from the KID (Key Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time. **Sustainable Finance Disclosure Regulation (SFDR) 2019/2088. The SFDR classification of the Funds may change over time.
Main risks of the fund
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