Emerging Market Strategies & Insights for 2025

Emerging-markets equities are expected to improve in the next decade—partly due to the expected reduction in USD currency headwinds. And Chinese equities, in particular, standout as attractive investments. So what do financial advisors need to know about investing in emerging markets?

By understanding the latest trends, you can build trust and find investment opportunities that may benefit your clients’ portfolios. Our Morningstar researchers analyze performance differences between emerging and developed market equities, return drivers, the Chinese equity market, and more.

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Emerging-markets equities lagged developed-markets equities over the last 10 years, during what was a strong period for US equities. In the decade prior, it was the reverse situation, with emerging-markets equities outperforming developed-markets equities.

USD outperformance has also contributed to the underperformance of emerging markets. In fact, the US dollar strength has been a feature of the last 10 years, acting as a headwind to emerging-markets equity performance.

The performance of emerging markets versus developed markets in local-currency terms has been negatively correlated with the performance of the US dollar. When the Dollar Index was lower, emerging markets tended to outperform. When the Dollar index was higher, emerging markets tended to underperform.

Attractive valuations for emerging-markets foreign exchange offer a potential tailwind over the next 10 years.

Currently, the degree of divergence between the cheapest and most expensive emerging-markets countries remains wide compared with history. Investors need to be selective as the valuation opportunities are more pronounced in some countries.

For example, Indian forward price/earnings multiples are higher while other index exposures, like China, are lower.

Over the long term, we expect Chinese equities to generate excess returns against broad emerging markets, driven predominantly by a reversion in valuation.

Technology in China also offers appealing earning yields. Before the regulatory crackdown in 2021, Chinese tech companies were delivering high growth for years. Following the decline in stock prices, the forward earnings yield has improved. While the era of high growth for these companies may have passed, the forward earnings at the current price still present investors with an attractive relative valuation. Additionally, a number of companies have been cutting costs by reducing headcount.

In the case of Chinese equities, attractive valuations mean that the odds are stacked in the investor’s favor.

Despite this attractive skew, there’s a small chance of very large losses that could stem from a material escalation in geopolitical conflict. With that said, portfolio sizing should account for low probability but high impact geopolitical risks.

Emerging markets could be suitable investments for some, but they come with risks. Emerging-market stocks offer attractive opportunities now, especially for long-term investors who can handle volatility.

Valuations in many of these markets look good, particularly in areas that haven't performed well recently or haven't been closely watched. Long-term returns could also be helped by a growing middle class and less pressure from currency exchange rates.

After a decade of underperforming developed markets, partly due to a strong U.S. dollar and China's slower economy, emerging markets might be ready for a recovery.

However, investors need to be careful when choosing where to invest. Valuations differ greatly between countries, meaning active management could help boost returns.

Risks still exist, including geopolitical tensions and the possibility of significant drops in value. Investor sentiment toward emerging markets is still cautious, which could be a warning sign or an indication that it's a good time to invest against the prevailing opinion.

Every client has different investment goals and priorities. When you know key trends on emerging markets, it may be easier to address your clients’ unique needs and help them create stronger portfolios.

With Morningstar Advisor Workstation, you can manage and monitor these portfolios. The all-in-one platform has the tools you need to compare portfolios across risk, performance, and exposure dimensions—making it easy to see the impact of different investment recommendations.

Request a demo today.