The recent recovery in equity markets has been quite sharp. Within that, the performance of Emerging Markets (EM) equities has been notable – reflecting the increasing dominance of technology stocks within the EM universe.
The chart below shows year-to-date performance for equity ETFs representing Europe, Emerging Markets and the Nasdaq (in GBP). EM has led the charge, up an impressive 20% so far this year. It’s also notable that it has matched the recovery in the Nasdaq since late March, whereas European equities have struggled a bit more.
We think the contrast is important because, as we’ve noted before, these are not the Emerging Markets of twenty years ago. Back then, Technology was around 10% of the EM equity universe, while commodities (energy and materials) were around 40%. Today, those figures have virtually reversed, with the tech weight sitting at around 38%, and commodities closer to 10%. And that has implications for what will drive EM equity returns going forward.
In terms of earnings growth, expectations for Emerging Markets this year are extremely strong. The chart below shows expected earnings growth for 2026 in EM, Europe and the US – with EM comfortably outpacing the others. More interestingly, those estimates have been revised up sharply from the start of the year – reflecting increased confidence about the outlook for tech spending.
Some of those numbers reflect the increasing dominance of TSMC, the semiconductor manufacturer, which is now the largest single stock in the EM universe. EM equities have become more concentrated, mirroring what we’ve seen in US equities. In 2010, the top ten stocks in EM accounted for around 15% of the total index. Today, that figure is around 35%.
Those earnings forecasts have helped improve EM valuations. The chart below shows the forward Price/Earnings ratio for EM, which has fallen over the past few months even though EM equities have risen. EM Equities have gone up, but earnings forecasts have gone up even more.
Putting that into context, we can compare EM valuations against Europe. The chart below looks at the EM Price/Earnings ratio compared to the P/E for European equities. On these metrics, EM equities look cheap compared to Europe.
Where does this get us? EM equities look pretty good value, compared to their own history and to European equities. We continue to hold EM equities across our mid to high risk portfolios. The caveat is that it’s all about the earnings growth, and specifically earnings in the global technology sector. That has implications for portfolio construction. It probably means we shouldn’t think about EM equities as being a real diversifier compared to, for instance, US equities – given the impact of tech in both those markets. While those companies do well, EM equities overall should flourish. And, for now, the outlook seems strong but it’s something we’ll continue to monitor.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
