Aberdeen Investments believes an upcycle for Emerging Markets equity performance may have started, driven by the three C’s of Capex (capital expenditure), Carry (impact of the US dollar on the asset class) and Cheap Valuations – but warns of risks from the monetisation of AI investments.
Emerging markets defied expectations in 2025, with the MSCI EM index outperforming developed markets for the first time since 2020 rising 34% in US dollar (USD) terms1 despite record‑low allocations and heightened geopolitical risks.
This may tentatively mark the start of a period of sustained outperformance versus the US, Aberdeen Investments believes. Despite this strong run, the MSCI EM Index still trades at a 42% discount to the S&P 500, wider than its long‑term average, 32% 2. And on a cyclically-adjusted basis (CAPE), Emerging Markets equities are actually at a 60% discount3.
Gabriel Sacks, Investment Director Asian Equities, at Aberdeen Investments comments; “Emerging Markets enter 2026 with strong momentum. After a transformative 2025, resilience amid geopolitical and policy risks has been underpinned by attractive valuations, improving fundamentals, and a supportive macro backdrop. Looking ahead, Global capex, favourable FX trends, and structural themes position Emerging Markets well.
“As ever, there are risks to manage. Concerns around stretched technology valuations are not just a US issue. But Emerging Markets technology valuations, particularly in Korea and Taiwan, are less demanding, and AI is only one of several earnings drivers for the foundries of North Asia. Memory‑chip demand is recovering as broad-based non-AI demand recovers, and India remains insulated as a domestic and consumption‑led market.”
What’s driving growth?
The global economic outlook appears favourable with policy easing across developed markets and global GDP growth forecast at around 3.4% 4, with emerging markets expected to drive much of this expansion. Investment into the real economy is driving GDP growth, with elevated capex spending globally, such cycles have historically driven faster earnings per share growth in emerging markets. History appears to be rhyming as consensus earnings growth for emerging markets is 18% in 20265. There is scope for yields earnings growth and valuations to drive the market.
Aberdeen highlights the structural drivers of a potential upcycle;
- Capex (capital expenditure)
- Fiscal deficits keep expanding: governments are leading a massive investment cycle, driven by a wide range of policy objectives. The result is increased spending on real assets as governments address defence needs, energy security, supply‑chain resilience and infrastructure deficits. In the US, Japan, the EU and China, fiscal deficits are expected to remain wide or will widen over 2026, boosting the real economy. Emerging market economies offer the industrial depth, technical expertise and resource abundance needed to meet this demand.
- AI Capex is not slowing: Bloomberg consensus points to around USD 600bn of capex from Meta, Google, Amazon and Microsoft. TSMC has raised its capex guidance to a record USD 56bn for 2026. Therefore, earnings prospects for hardware names remain attractive, with memory suppliers in Korea, in particular, leveraging their market position to raise prices. Consensus earnings growth for the technology hardware sub-sector stands at 49%. While risks are rising, investment spending is accelerating and continues to drive earnings higher.
- Carry (the impact of the US dollar on the asset class): short‑term currency moves are hard to predict, but the structural case for a weaker dollar remains intact. US policy, stronger EM balance sheets and rising domestic investment are driving both capital outflows from the dollar and inflows into EM markets. This is already reflected in firmer EM and Asian currencies this year.
- Cheap: the MSCI EM Index is still trading at a ~42% discount to the S&P 500, a gap that is wider than the long-term average, 32%. US tech valuations are being questioned, and data centre monetisation still needs to be proven. EM’s breadth looks increasingly valuable: domestic consumption is reviving, policy is easing and the winners are broadening beyond AI to the memory segment, industrials and India’s domestic demand story.
