Unlocking Value: Undervalued Sectors in Emerging Market Equities Show Resilience in H1 2025

In the first half of 2025, emerging market equities have defied pessimism, delivering robust returns amid a fragile global economic landscape. The MSCI Emerging Markets IMI Index surged 12.7% in Q2 alone, outperforming both developed markets and U.S. equitiesTurning Tides: EM Equities Are Surging in 2025 | VanEck, [https://www.vaneck.com/us/en/blogs/emerging-markets-equity/turning-tides-em-equities-are-surging-in-2025/]^[1]. This rebound reflects a confluence of factors: stabilization in China's property sector, easing inflation in key economies, and policy tailwinds in India and BrazilTurning Tides: EM Equities Are Surging in 2025 | VanEck, [https://www.vaneck.com/us/en/blogs/emerging-markets-equity/turning-tides-em-equities-are-surging-in-2025/]^[1]. Yet, the real story lies beneath the headline numbers-specifically, in the undervalued sectors driving this recovery.

Industrials: The Unheralded Engine of EM Growth

Industrials have emerged as the "unsung hero" of H1 2025, delivering consistent returns across regionsTwo Quarters, Two Moods: What Equity Markets Taught Us in H1 2025 | S&P Global, [https://www.spglobal.com/market-intelligence/en/news-insights/research/2025/07/two-quarters-two-moods-what-equity-markets-taught-us-in-h1-2025]^[2]. This sector's strength is rooted in global capital investment trends, particularly in infrastructure and manufacturing. For example, Brazil's industrials sector, trading at a forward P/E of 7.09Emerging Markets Equity Valuations 2025 | Siblis Research, [https://siblisresearch.com/data/emerging-markets-valuations/]^[3], has benefited from renewed government focus on industrial modernization. Similarly, India's manufacturing push under its Production Linked Incentive (PLI) scheme has boosted earnings visibility for EM industrials.

The sector's outperformance contrasts sharply with the volatility of high-multiple technology stocks in EMs, which, despite a 58.4% earnings surge2025 Emerging Markets Outlook | Ashmore Group, [https://www.ashmoregroup.com/en-us/insights/2025-emerging-markets-outlook]^[4], remain susceptible to macroeconomic shocks. Industrial firms, by contrast, offer a blend of valuation discipline and earnings resilience, making them a compelling case for investors seeking balanced growth.

Consumer Staples and Healthcare: Resilience in a Fragmented Recovery

While industrials lead the charge, sectors like consumer staples and healthcare are quietly gaining traction. Consumer staples, rated Marketperform by Charles SchwabMonthly Stock Sector Outlook (2025) | Charles Schwab, [https://www.schwab.com/learn/story/stock-sector-outlook?msockid=21e637ef8c2c634b24d821698dd56226]^[5], have shown resilience as demand for essentials remains stable even amid inflation. However, margins face pressure from tariffs and input costs, particularly in markets like Mexico and South Africa.

Healthcare, another Marketperform sectorMonthly Stock Sector Outlook (2025) | Charles Schwab, [https://www.schwab.com/learn/story/stock-sector-outlook?msockid=21e637ef8c2c634b24d821698dd56226]^[5], is benefiting from structural demand for medical services and pharmaceuticals. Yet, sub-sectors like biotechnology remain vulnerable due to weak fundamentals, underscoring the need for selective exposure.

Valuation Metrics: A Tale of Discounts and Opportunities

Emerging market equities trade at a historically wide discount to developed markets, with the MSCI EM Index sporting a trailing P/E of 15.13 and forward P/E of 11.87Emerging Markets Equity Valuations 2025 | Siblis Research, [https://siblisresearch.com/data/emerging-markets-valuations/]^[3]. This discount is even more pronounced in specific markets: Brazil's stock market, for instance, trades at a forward P/E of 7.09Emerging Markets Equity Valuations 2025 | Siblis Research, [https://siblisresearch.com/data/emerging-markets-valuations/]^[3], while India's elevated valuations (trailing P/E of 22.20Emerging Markets Equity Valuations 2025 | Siblis Research, [https://siblisresearch.com/data/emerging-markets-valuations/]^[3]) reflect divergent growth narratives.

The broader EM index's P/E of 15.21 as of September 2025Turning Tides: EM Equities Are Surging in 2025 | VanEck, [https://www.vaneck.com/us/en/blogs/emerging-markets-equity/turning-tides-em-equities-are-surging-in-2025/]^[1]-though above its 5-year average-remains attractive relative to U.S. sectors like Advertising (P/E of 40.78Price to Earnings (P/E) Ratios by Industry (2025) | Eqvista, [https://eqvista.com/price-to-earnings-pe-ratios-by-industry/]^[6]) and Aerospace & Defense (30.21Price to Earnings (P/E) Ratios by Industry (2025) | Eqvista, [https://eqvista.com/price-to-earnings-pe-ratios-by-industry/]^[6]). This valuation gap suggests untapped potential, particularly for sectors with strong earnings momentum.

Risks and Strategic Considerations

Despite the positive momentum, the recovery remains fragile. Moody's cautions that liquidity constraints and external shocks-such as a potential U.S. dollar rebound-could disrupt progressMonthly Stock Sector Outlook (2025) | Charles Schwab, [https://www.schwab.com/learn/story/stock-sector-outlook?msockid=21e637ef8c2c634b24d821698dd56226]^[5]. Additionally, regional disparities persist: while India and Brazil thrive, economies reliant on commodity exports (e.g., Russia, which remains inaccessible to Western investorsEmerging Markets Equity Valuations 2025 | Siblis Research, [https://siblisresearch.com/data/emerging-markets-valuations/]^[3]) lag behind.

For investors, the key lies in balancing exposure. Sectors like industrials and consumer staples offer defensive qualities, while healthcare and utilities provide long-term growth potential. However, strategic positioning must account for macroeconomic volatility and currency risks.

Conclusion: A Case for Diversification and Discipline

The H1 2025 results underscore emerging markets' ability to generate alpha through undervalued sectors. With industrials leading the charge and consumer staples and healthcare showing resilience, the case for EM equities is bolstered by favorable valuations and macroeconomic tailwinds. Yet, as RBC GAM notes, the path ahead will be marked by volatility, particularly post-U.S. electionsTurning Tides: EM Equities Are Surging in 2025 | VanEck, [https://www.vaneck.com/us/en/blogs/emerging-markets-equity/turning-tides-em-equities-are-surging-in-2025/]^[1]. Investors who prioritize diversification and sectoral discipline-focusing on earnings quality over speculative growth-stand to benefit from the next phase of EM's recovery.