After years of lagging behind developed market investments, emerging market equities roared back in the first half of 2025, with the MSCI Emerging Markets Index rising 17-18% in the year to June 30. In contrast, the S&P500 gained about 9-10% in the same period.

This outperformance has sharpened investor focus on the evolving opportunity set within emerging markets. Despite making up around 12% of the MSCI All Country World Index by market capitalisation, most Australian investors remain underweight in emerging market equities. 

Traditionally sidelined in Australian portfolios due to a combination of perceived volatility, unfamiliarity and geopolitical risk, there are signs this underrepresentation is beginning to shift.

A recent Bank of America survey of global fund managers reveals 37% are now overweight developing world equities – the largest margin in more than two years.

According to data from AUSIEX, trading activity in emerging markets ETFs has increased significantly in the Australian market in 2025. 

Net flows into emerging markets exchange-traded products (ETPs) on the platform were 27.7% higher in the first half of 2025 compared to the second half of 2024, and up 68.4% compared to the same period last year. 

The buy/sell ratio (which reflects the strength of buying relative to selling) climbed above 0.7 in May, June and July, marking the highest levels since at least January 2023. 

Macro shifts reignite EM growth story

Analysts say the set of macro drivers that historically kept many investors on the sidelines of emerging markets have begun to shift.

While risks such as geopolitical instability, regulatory volatility, currency swings, and inflation pressures remain, the investment landscape is evolving. A weaker US dollar, moderating inflation in key economies and regions, and stronger relative valuations are all factors drawing renewed interest in the asset class. 

The International Monetary Fund (IMF) projects that the growth rate in emerging markets will rapidly outstrip developed markets in 2025, forecasting GDP growth of 1.8% in advanced economies, compared to 4.2% for emerging and developing economies.

A falling US dollar, however, remains the primary macroeconomic driver for emerging market outperformance so far in 2025, according to Sydney-based VanEck Portfolio Manager Mr. Cameron McCormack:

‘A lower US dollar reduces the financial burden of USD-denominated EM (emerging market) debt and lifts commodity prices benefiting export-heavy nations like Brazil’.

‘The weaker dollar makes it more economical for those in emerging markets to finance their US dollar debts, favouring emerging market companies and limiting the impact of those emerging markets subject to tariffs’, says Mr. McCormack.

Valuations look ‘very compelling’ 

‘In a global market where many asset classes are stretched, emerging market equities remain one of the few areas offering deep relative value’, says Mr. McCormack. ‘They are currently trading at ~40% and almost 50% discount on a price-to-earnings (P/E) and a price-to-book (P/B) basis to developed markets, respectively, and these discounts are higher than long-term averages’.

‘In short, valuations look very compelling’, says Mr. McCormack. ‘Emerging market equities are one of a few asset classes not ‘priced to perfection’, making them potentially less susceptible to any downside shocks’.

Despite emerging markets outperforming developed and US equities in 2025, performance across regions and sectors remains uneven.

Investors who take a broad-brush approach risk being exposed to underperforming markets or structural headwinds in specific regions – making country, sector, and stock selection critical. 

Mr. McCormack points to the performance of VanEck’s MSCI Multifactor Emerging Markets Diversified ETF (ASX: EMKT) outperforming its benchmark by nearly 4% in the year-to-date by April 25– as the result of a deliberate tilt toward value and smaller-cap segments. 

‘We’ve also seen technology companies rally in Hong Kong, Korea, and Taiwan, where valuations are more compelling relative to developed markets’.

Over the period, the performance of VanEck’s MSCI Multifactor Emerging Markets Diversified Multiple-Factor ETF (ASX:EMKT), was driven by its rules-based focus, helping it to capture differentiated returns and avoid pockets of risk in underperforming regions or industries, he says.

High performers in the fund included value-heavy banking names, for example, Korea’s Hana Financial Group (listed on the Korea Exchange under the ticker/code 086790), and others benefiting from improving macroeconomic conditions and increased M&A and digitisation activity.

Recent product launches also point to growing conviction behind the emerging markets theme. In the U.S, Vanguard has filed for a new Emerging Markets ex-China ETF, reflecting investor demand for emerging market exposure without Chinese market risk. Meanwhile, VanEck recently launched the VanEck India Growth Leaders ETF (ASX:GRIN), providing targeted exposure to India’s economic expansion - projected by the IMF to lead global growth in 2025. According to VanEck, the ETF offers access to ‘50 fundamentally strong, attractively valued Indian companies with consistent earnings growth, selected using a rules-based GARP (Growth at a Reasonable Price) methodology’.

These product developments offering tailored exposure to emerging market themes give advisers the ability to fine-tune their clients’ exposure based on regional preferences, risk appetite, and conviction.

Advisers reassess allocations

While emerging markets remain a less familiar asset class for many Australian investors, macroeconomic shifts and evolving structural growth drivers are prompting advisers to reassess portfolio allocations to this sector. 

Many appear to be taking advantage of the opportunity to add uncorrelated growth to portfolios – particularly for pre-retiree clients underweight global equities.

AUSIEX data shows that interest in emerging markets ETFs has not only increased in dollar terms in the first half of 2025 but is also being led by key investor cohorts within the Australian market. 

The most actively traded emerging markets ETFs on the AUSIEX platform in the first half of 2025 were the Vanguard FTSE Emerging Markets Shares ETF (ASX:VGE), iShares MSCI Emerging Markets ETF (ASX:IEM), and VanEck’s MSCI Multifactor Emerging Markets Diversified Multiple-Factor Index (ASX:EMKT), followed by iShares MSCI Emerging Markets ex-China Index (Nasdaq: EMXC), iShares JPMorgan USD Emerging Markets Bond ETF (Nasdaq: IHEB), and the managed fund Nanuk New World Fund (hedged class).

Notably, advised and platform clients held the largest share of emerging market ETF positions in the first half of 2025, according to AUSIEX data, indicating strong demand from professionally supported investors. 

Gen X investors were the most active cohort, holding nearly 60% of total emerging market ETF positions, followed by Baby Boomers at 31.45%. The majority of holdings were in pre-retirement accounts (56.25%), with retirees accounting for a further 34.38%. Trading activity was broadly distributed across both large and small accounts, but SMSFs were over-represented in trade volume relative to their share of total accounts, suggesting a strong tactical allocation from this cohort.

These patterns suggest that as emerging markets outperform and valuation gaps persist, Australia’s more sophisticated investor segments – particularly advised, SMSF and Gen X clients – are responding with increased allocations to both core and differentiated emerging market strategies.

While actual allocations among global equity managers often fall in the 6-8% range, asset managers such as Vanguard, BlackRock and Morningstar generally imply that emerging markets should represent a strategic allocation of 5% and 10% in well-diversified global equity portfolios. 

Rethinking EM’s role in a portfolio

The resurgence of emerging markets in 2025 is a reminder they are no longer a fringe allocation but are becoming central to global growth. The IMF expects emerging economies to drive more than 60% of global GDP expansion this year, led by India and Indonesia. 

For Australian investors, it’s an opportunity to reassess how emerging markets fit into a diversified, forward-looking portfolio. The sector’s strength is a moment to consider how these dynamic markets fit into a broader strategy. With a prudent approach, emerging markets can offer long-term growth potential and valuable diversification benefits. 

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