Why Emerging Markets Are Poised for Sustained Outperformance in 2026

The global investment landscape is undergoing a profound transformation, with emerging markets (EMs) increasingly positioned to outperform developed markets in 2026. This shift is driven by structural changes in global capital flows, valuation asymmetry, and evolving institutional frameworks. As geopolitical dynamics and monetary policy divergence reshape capital allocation, EMs are leveraging their demographic advantages, AI-driven growth, and improved macroeconomic resilience to attract long-term investment.

Structural Shifts in Global Capital Flows

Structural asymmetries in capital flows have become a defining feature of EM markets. According to a report by OMFIF, institutional positioning-defined by size, geopolitical maneuverability, and access to diversified financing-will determine how EM economies manage external imbalances in 2026. Larger economies like India, Brazil, and Vietnam, with robust institutional frameworks and strategic infrastructure financing, are better equipped to navigate fragmented global financial systems compared to smaller EMs.

Monetary policy divergence further amplifies these trends. Central banks in EMs are poised to cut interest rates in 2026, contrasting with tighter conditions in developed markets, particularly the U.S. This divergence is expected to drive capital toward EM equities and debt, as investors seek higher yields amid a weaker U.S. dollar. For instance, JPMorgan projects significant inflows into emerging-debt funds in 2026, fueled by dollar depreciation and AI-related investment cycles.

Valuation Asymmetry and Attractive Entry Points

Valuation asymmetry between EM and developed markets has reached historically compelling levels. The MSCI Emerging Markets Index trades at a forward price-to-earnings (P/E) ratio of 12.4x as of 2025, near its 25-year average, while the S&P 500 commands a 40% premium according to JPMorgan analysis. This discount is further supported by EM equities' price-to-book ratio of 1.9 and forward P/E of 13, slightly above their long-term averages. Such valuations reflect undervaluation relative to fundamentals, particularly in sectors like technology and infrastructure.

The weakening U.S. dollar, down 10.6% since early 2025, also provides a tailwind for EM assets. Currency depreciation historically correlates with improved equity performance in these markets, as local-currency earnings gain in value. Additionally, AI-driven investment cycles are boosting EM corporate earnings. Firms in Taiwan, South Korea, and China are leading in advanced chip manufacturing for AI servers, driving double-digit profit growth in key EM economies.

Demographic Trends and Structural Reforms

Demographic advantages are another cornerstone of EM outperformance. India, with its growing, young population and domestic-oriented economy, is highlighted as a long-term investment opportunity despite short-term trade tensions. Similarly, Latin American economies like Mexico benefit from USMCA renegotiations and strong U.S. manufacturing linkages. These demographic tailwinds, combined with structural reforms in corporate governance and capital discipline, are enhancing EMs' growth potential.

Institutional Frameworks and Risk Mitigation

Emerging markets are also closing the gap with developed markets in institutional quality. Central banks in EMs have adopted inflation targeting, improved policy communication, and strengthened fiscal rules, reducing sovereign borrowing costs and enhancing debt sustainability. For example, local-currency assets in EMs now exhibit lower volatility compared to historical trends, reflecting deeper domestic investor bases and reduced reliance on foreign-currency debt.

Moreover, EMs are demonstrating resilience to capital flow volatility. Spreads on the JPMorgan Emerging Markets Bond Index have widened less during global risk-off episodes compared to pre-2008 levels, attributed to stronger fiscal credibility and IMF precautionary credit lines. This improved credit quality, coupled with gradual credit rating upgrades, underscores EMs' growing integration into global capital markets.

Conclusion: A New Era for Emerging Markets

The confluence of structural shifts in capital flows, valuation asymmetry, demographic tailwinds, and institutional improvements positions EMs for sustained outperformance in 2026. As global portfolios remain structurally under-allocated to EMs despite their growing contribution to global GDP, the potential for re-rating remains significant. Investors who recognize these dynamics early stand to benefit from a landscape where EMs are no longer peripheral but central to the next phase of global growth.