Strategic Allocation to Emerging Markets in 2026

As global investors look ahead to 2026, emerging markets (EMs) are increasingly positioned to outperform developed markets, driven by a confluence of macroeconomic tailwinds and structural growth trends. According to J.P. Morgan Global Research, EM equities are forecast to deliver robust returns in 2026, fueled by falling local interest rates, stronger earnings growth, and attractive valuations relative to developed markets. This optimism is echoed by East Capital, which highlights that EMs are trading at a 35% forward price-to-earnings (P/E) discount to developed markets-the largest such gap in 15 years-while offering a 14.9% earnings compound annual growth rate over the next two years, slightly outpacing the S&P 500's 14.5%.

Macroeconomic Tailwinds and Valuation Gaps

The International Monetary Fund (IMF) underscores the macroeconomic case for EMs, projecting that emerging and developing economies will grow at 4.2% in 2025, far outstripping the 1.6% growth expected in advanced economies. This divergence is critical for investors seeking to capitalize on undervalued markets. Data from East Capital further notes that EM equities attracted only $21.5 billion in net inflows in 2025, leaving them at just 5.2% of global equity fund assets under management compared to their 11% weight in the MSCI ACWI index. This underallocation suggests significant room for capital reallocation, particularly as global interest rates trend downward and EM corporate governance improves.

Structural Growth and Sector Opportunities

Beyond macroeconomic factors, structural trends in specific EMs are creating high-conviction investment opportunities. For instance, East Capital highlights underappreciated tech leaders in China and AI enablers in Taiwan and South Korea as key drivers of growth. Meanwhile, India's structural expansion-driven by demographic shifts, digital infrastructure, and manufacturing reforms-positions it as a long-term growth engine. Charles Schwab's 2026 outlook adds that Germany's fiscal stimulus and Japan's shareholder-friendly reforms could indirectly bolster EM performance by strengthening global demand and easing supply chain pressures.

ETF Selection: Active vs. Passive Strategies

For investors seeking exposure to these opportunities, exchange-traded funds (ETFs) offer a streamlined approach. Active international ETFs, such as the T. Rowe Price International Equity ETF, have demonstrated strong performance in 2025, returning 32.5% year-to-date through a bottom-up focus on quality business models and high-growth sectors. However, passive options remain compelling for their low costs and broad diversification. The Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) provide access to a wide array of EM equities, capitalizing on industrial development, consumer sector expansion, and global supply chain diversification.

Strategic Allocation Considerations

While the case for EMs is strong, strategic allocation requires balancing risk and reward. Investors should prioritize ETFs with low expense ratios and strong liquidity, particularly in volatile markets. Additionally, dollar weakness-a potential tailwind for EMs-could amplify returns for U.S.-based investors. Diversification across regions and sectors is also critical to mitigate idiosyncratic risks, such as political instability or currency fluctuations.

Conclusion

Emerging markets in 2026 present a rare combination of macroeconomic momentum, valuation discounts, and structural growth narratives. By leveraging both active and passive ETF strategies, investors can position portfolios to benefit from these dynamics while managing risk. As J.P. Morgan and East Capital emphasize, the underallocation to EMs and their improving fundamentals make them a compelling addition to a forward-looking investment strategy.