Is This the Start of a Multi-Year Outperformance Cycle for Emerging Markets?

The question of whether emerging markets (EM) are entering a sustained period of outperformance has gained urgency in 2025. A confluence of cyclical and secular forces-ranging from valuation gaps and currency dynamics to structural economic reforms and technological adoption-is creating a compelling case for a multi-year shift in EM equity and currency valuations. This analysis explores how these factors align to support a potential inflection point for EM markets.

Cyclical Catalysts: Valuation Gaps and Currency Trends

Emerging markets equities have entered 2025 with a stark valuation advantage over their developed counterparts. As of May 2025, the MSCI EM index traded at 12 times forward earnings, compared to over 21 times for U.S. equities, marking one of the widest spreads in two decades. This gap, coupled with strong earnings growth and a weakening U.S. dollar, has drawn capital to EM assets. For instance, the Brazilian real (BRL) appreciated to 5.29 against the dollar in November 2025, reflecting improved macroeconomic fundamentals and expectations of tighter monetary policy. Similarly, the Indian rupee (INR) stabilized at 88.3691, while the Chinese yuan (CNY) maintained a controlled appreciation trajectory under the PBOC's guidance. These currency movements, driven by divergent monetary policies and EM central banks' proactive interventions, have enhanced the real returns for EM investors.

GDP growth in EM economies further reinforces this narrative. China's third-quarter 2025 GDP expanded by 4.8% year-on-year, contributing to a year-to-date growth of 5.2%-exceeding its annual target. Meanwhile, global projections suggest EM economies will grow at 4.4% in 2026, outpacing advanced economies' 1.5% growth. Such performance, combined with narrowing interest rate differentials and a bearish outlook for the U.S. dollar, creates a favorable backdrop for EM outperformance.

Secular Shifts: Technology, Demographics, and Structural Reforms

Beyond cyclical factors, structural trends are reshaping EM fundamentals. Technology adoption in fintech-spanning blockchain, AI, and decentralized finance (DeFi)-is transforming financial ecosystems. The global fintech market, valued at $231.30 billion in 2023, is projected to grow at a 24.41% CAGR, reaching $2.83 trillion by 2034. Innovations like AI-driven credit scoring and blockchain-enabled cross-border payments are reducing costs and expanding access to financial services, particularly in underbanked regions. This technological leap is not merely incremental but foundational, enabling EM markets to leapfrog traditional infrastructure constraints.

Demographic dynamics further amplify this potential. While aging populations in parts of Asia and Europe pose challenges, regions like Africa and Southeast Asia are leveraging their young, growing labor forces to drive innovation and consumption. For example, India's demographic dividend-projected to fuel 6.4% GDP growth in FY25-has spurred investments in infrastructure and education. Conversely, aging economies require structural reforms, such as pension adjustments and immigration policies, to mitigate fiscal pressures. These divergent demographic trajectories are reshaping asset allocations, with younger populations favoring growth-oriented equities and aging cohorts prioritizing income-generating assets.

Structural economic reforms in major EM economies are also gaining traction. China's dual circulation strategy, which emphasizes domestic innovation, aims to insulate its economy from geopolitical risks while expanding trade networks. India's GST 2.0 and labor code reforms have streamlined compliance, attracting $55.6 billion in FDI in FY25. Brazil, meanwhile, has drawn $4.18 billion in Chinese investments for energy and electrified vehicle manufacturing, aligning with its industrialization goals. These policies are not isolated but part of a broader recalibration of global economic partnerships, reducing EM reliance on U.S. or Chinese-centric growth models.

Convergence of Secular and Cyclical Forces

The interplay between these secular and cyclical factors is creating a self-reinforcing cycle. Strong EM fundamentals-bolstered by structural reforms and technological adoption-are narrowing valuation gaps and attracting capital inflows. Meanwhile, currency strength and GDP growth are enhancing the real returns of EM assets, further incentivizing investment. For instance, India's National Infrastructure Pipeline (NIP), targeting $1.9 trillion in projects, is expected to boost productivity and consumption, supporting its 2026 GDP growth projections. Similarly, Brazil's energy sector investments are positioning it as a key player in the global transition to renewables.

However, risks remain. Geopolitical tensions, inflationary pressures, and uneven policy execution could disrupt this trajectory. Yet, the current alignment of factors-low valuations, favorable currency dynamics, and structural resilience-suggests that EM markets are not merely rebounding but undergoing a deeper, more enduring transformation.

Conclusion

The convergence of cyclical tailwinds and secular shifts in EM markets points to a potential multi-year outperformance cycle. As valuation gaps persist, currencies strengthen, and structural reforms take root, emerging markets are increasingly positioned to deliver both growth and diversification benefits. For investors, the question is no longer whether EM can outperform, but how to capitalize on this evolving landscape.