Rising defense spending in Europe/NATO, AI buildout across the U.S. and China and global focus on energy and resource security all support strong earnings growth across emerging markets.
The MSCI Emerging markets index delivered an impressive 34.4% return in USD last year and has continued to deliver excess returns to start 2026 – up 11.5% YTD at the time of writing1. It’s notable that profits, not multiples, have been doing most of the work, a dynamic that’s consistent across most emerging regions. Last year, earnings contributed 47% to EM total returns but just 13% to Eurozone performance. What’s more, earnings growth has contributed to all the returns for EM so far this year, but less than 20% for Europe and Japan, which have largely benefited multiple expansion. The resilience in earnings growth across emerging regions leads us to favor EM assets this year, particularly areas that are benefitting from structural themes that we expect will play out over years.
- EM Asia ex. China earnings are supported by macro tailwinds tied to Europe’s defense spending pivot and the AI capex super-cycle. Europe’s rearmament is reshaping procurement, and South Korea has emerged as a fast-delivery, NATO-compatible supplier. In addition, the AI buildout in the U.S. and China continues to cascade through the semiconductor stack, supporting Taiwan exporters. ASEAN economies capture spillover too like Malaysia’s packaging/testing ecosystem and Vietnam’s electronics base.
- Emerging EMEA are benefiting from growing consumer markets and increased investment in digitization, and technology and energy infrastructure. Moreover, declining inflation gives central banks room to ease further, a dynamic consistent across regions like South Africa, Egypt and Czech Republic, and supportive for a market heavily weighted to financials and materials.
- While on the surface, EM LATAM earnings outlook hasn’t contributed quite as strongly to returns as other emerging markets, Latin America remains the clearest way to express the global grab for resources. Latin American economies—and its investable universe—have heavy exposure to materials and energy; therefore, commodity strength ultimately translate into earnings and dividends. Mexico grew earnings by 45% last year, and while Brazil’s earnings grew by a “less-than-stellar” ~14%, a supportive commodity backdrop and improving fiscal signals alongside low starting valuations amplified total returns.
One overlay that ties the regions together is the dollar. Historically, a weaker USD has been supportive of EM assets by easing external financing conditions and improving the debt-service for dollar-linked liabilities. While we don’t expect another 10% correction in the dollar in the short term, we do foresee an environment where the dollar can gradually decline 2-4% per annum over the next 5-7 years. In summary, rising defense spending in Europe/NATO, AI buildout across the U.S. and China and global focus on energy and resource security all support strong earnings growth across emerging markets tethered to these structural themes. A gradual decline in the dollar also serves as a nice cherry on top to returns for US investors.