For over a decade, emerging markets have disappointed investors as developed market equities, particularly US technology stocks, delivered superior returns. The MSCI EM index (net total return USD) gained 8.3% in 2024 versus nearly 20% for MSCI World markets (net total return USD), continuing a pattern that cemented negative sentiment.
Yet beneath this underperformance lies a compelling turnaround story. MSCI Emerging Markets trades at approximately 12x forward P/E, compared to MSCI World at 18x and the S&P 500 at 21x, the widest discount in 20 years. A higher P/E multiple means the market is more “expensive” relative to future profits, while a lower forward P/E suggests better value if earnings expectations hold. When valuations reach such extremes whilst growth prospects remain intact, mean reversion becomes a question of when, not if.
The DCS Emerging Markets Fund in 2025 has delivered 28% year-to-date performance, demonstrating that active management can extract significant alpha even during challenging periods. Since 2001 to November 2025, the S&P 500 and MSCI EM have posted similar annualised compound returns of 8.6% and 8.7% respectively. From 2003 to 2007, emerging markets outperformed the S&P 500 by about 24 percentage points annually. These cycles matter for investors willing to position ahead of inflection points.
The fundamental case rests on demographics that developed economies cannot replicate. Younger populations and expanding middle classes across India, Indonesia, Vietnam, Mexico, Brazil, South Korea and Taiwan create consumption patterns driving sustained growth. India’s GDP growth is projected at 6.6% in 2025, while emerging markets overall are expected to grow at 3.7% which is more than double advanced economies.
Ongoing urbanization requires housing, transportation, energy infrastructure and consumer goods, creating sustained demand supporting corporate earnings for years. This multi-decade structural theme provides visibility that cyclical developed markets increasingly lack.
EM earnings per share is forecast to grow 31% over the next two years, compared to 24% for MSCI World and 27% for the S&P 500. This gap cannot be justified by quality differentials, as emerging market indices have evolved dramatically with significant technology allocation.
Emerging markets enter this period with stronger fiscal positions than developed counterparts. During COVID-19, emerging economies demonstrated restraint contrasting sharply with developed market debt accumulation. The average EM credit rating stands at BBB-, the highest level ever achieved.
The first half of 2025 saw the worst US dollar performance in over 50 years, historically associated with strong emerging market returns. A weaker dollar reduces debt servicing costs, boosts commodity prices supporting export revenues, and encourages capital flows seeking higher returns.
The realignment of global supply chains away from China represents a multi-year investment cycle benefiting Vietnam, India, Mexico, Thailand and Indonesia, as companies like Google, Microsoft and Dell shift production. This represents permanent reallocation of production capacity supporting emerging market growth for decades.
Taiwan’s exports in 2024 were significantly higher than in 2023 from semiconductor demand and AI capital expenditure. Taiwan Semiconductor Manufacturing Company remains central to global technology supply chains. South Korea’s Samsung and technology champions across India and Southeast Asia provide emerging market exposure to secular technology themes at attractive valuations, “backdoor AI” exposure without extreme developed market valuations.
Political stability remains more fragile, with election outcomes and policy shifts producing volatility. Currency fluctuations can overwhelm underlying returns during risk aversion periods. Commodity dependence creates cyclical vulnerability when global growth slows.
The combination of extreme valuations, strong growth differentials, improving fiscal positions, dollar weakness and supply chain realignment creates conditions historically associated with sustained outperformance. Emerging market equities have significantly outperformed developed market equities through November 2025, potentially marking the early stages of a new cycle.
Pacific’s Emerging Markets Fund has substantially outperformed both the index and competitor funds, demonstrating that active management can extract significant alpha through selective positioning. From its inception to 31 December 2024, the Strategy has outperformed in 11 of the last 13 full calendar years, outperforming the MSCI Emerging Markets Index by 4.2% on an annualised basis, net of fees. This reflects continued inefficiency where analytical rigour translates into superior returns.
For portfolio construction, emerging markets deserve allocation as exposure to the world’s growth engine at valuations embedding pessimism rather than optimism. The demographic tailwinds, structural reforms, supply chain realignment and technology participation create a fundamental case transcending temporary headwinds.
The question is whether investors can look beyond a decade of disappointing returns to position for what appears to be an emerging new cycle. Those who maintain discipline and focus on long-term structural themes may find that emerging markets finally deliver sustained, superior returns driven by economic growth that developed economies can no longer generate.
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