China Research

Currently, emerging markets are frequently suggested as interesting areas for financial portfolio investment, particularly since emerging markets as a group in 2025 managed to outperform stock markets in traditional OECD countries.

However, it should not be neglected that the analysis of emerging markets remains very difficult and needs quite some experience and understanding. Institutional, political and frequently also social shortcomings should be related to existing positive parameters in emerging countries. On the positive side, one may single out (mostly) decent or even good economic growth and comparative advantages such as young populations, low(er) labor costs compared to advanced countries, technological catch-up opportunities with improving productivity gains, and also commodity reserves.

Sources of misunderstanding

When trying to find emerging countries as a relevant area for financial portfolio investment, one can also discover quite a number of potential risks and traps. Some examples are summed up below.

# Emerging markets are not a homogenous group of countries – and certainly not even within the same continent either. For this reason, currency risks may differ from country to country. Currency developments may have a major impact on the return of an investment in foreign stock markets. This is why I always prefer to make my analysis country by country (even when there exist many similarities).

# Statistical shortcomings still can be found in most emerging countries; thus, the real state of the economy may look (somewhat) different from the positive impression that many times is given officially.

# Transparency in emerging countries may be insufficient also in other areas than statistics, for example to what extent existing good laws are applied consequently.

# In more general terms, one may point at the fact that institutional conditions may differ substantially between emerging countries despite similar growth rates of GDP. Institutions may have a major impact on the functionality of financial markets in different emerging countries which can induce a decisive disparities when analyzing prospects for GDP growth.

# Ethical and financial stability rules (regulations) and their application in the financial system should play an important role for foreign investors as well – but also the quality of banking managers.

# It should be observed, too, that stock markets themselves in emerging countries may have different degrees of development and maturity, for example when it comes to liquidity and traded stock volumes. Sometimes trade volumes are very low.

# Furthermore, the political system of an emerging market can make a difference as regards credibility and trust. This issue can also influence the social stability of an emerging country.

# Last but not least, historical experience may be relevant for investors’ psychological attitude vis-a-vis stock business in a certain emerging market. This psychological aspect should not be underestimated when considering the probable stability of Western portfolio investments in emerging countries.

Financial markets in the emerging world more recently*

My comments and conclusions above are certainly applicable to many emerging countries – but to a varying extent in both frequency and depth. At the same time, it may be interesting to look somewhat further into the recent performance of some relevant stock markets in the world of emerging countries – and to have some words on the potential long-term outlook.

Stock markets in emerging countries as a group have been experiencing rapid expansion more recently and particularly since 2025. They performed better than stock markets in  advanced countries, very much driven by AI in Asian countries and demand for commodities in other parts of the world – but also by geographical diversification strategies since the economic projections for the U.S. have become more uncertain.

Many experts believe these days – whatever this means – that emerging countries may achieve considerably higher equity returns over the next decade or so compared to more modest assumptions for the U.S. However, this positive outlook for emerging countries is very much based on continuous and undistorted progress in the infrastructure of AI, working commodity markets and political stability in mainly the U.S. and important Asian countries – something we currently do not know very much about.

We should also keep in mind that emerging countries still stand for only 12-13 percent of global stock market capitalization – but for the lion share of global GDP growth, i.e. around 70-75 percent more recently. These numbers may indicate a further structural long-term rise of stock-market capitalization in advanced emerging market countries.

*Further information on stock markets in emerging countries can be received by big financial firms, e.g. https://www.msci.com/documents/1296102/e7613c4f-f16c-b039-f69a-fbdaafed579f, https://www.msci.com/eqb/gimi/stdindex/market_classification.html,                                                                             and also https://am.jpmorgan.com/gb/en/asset-management/per/insights/market-insights/market-updates/monthly-market-review/,                                                                                                            https://www.carmignac.com/en-gb/our-funds/fp-carmignac-emerging-markets-GB00BK1W2P36-a-gbp-acc.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University