Money Is Rushing Back Into Emerging Markets Stocks

Emerging market equities have been overshadowed by the dominance of US tech giants and a global preference for assets perceived as lower-risk for several years. This year, the dynamic has shifted: Against a backdrop of a weakening US dollar and growing uncertainty over US trade policies, emerging markets are once again attracting interest from investors seeking growth and diversification.

The agreement of a tariff framework between the US and China, the combination of depressed multiples and reaccelerating fundamentals has triggered reallocation flows.

Best Inflows in Years

To confirm this, Europe-domiciled global emerging market equity funds just closed their best quarter in terms of net inflows since the first quarter of 2023, with EUR 9.1 billion taken between July and September, bringing total net inflows since the start of 2025 to EUR 11.6 billion.

The Surge of Passive Strategies

Emerging markets equity has long been the home turf of specialist active managers. Illiquid and fragmented markets, governance and data gaps, and pronounced idiosyncratic risk rewarded conscious stock-picking- at least in theory. Yet, the last three years have seen a pronounced shift in the way investors access emerging markets: A growing share of flows, assets and attention is going into passive vehicles such as index funds, rather than traditional active mandates.

As shown by Morningstar’s latest European Active/Passive Barometer report, this is a trend that has been observable for some time across the entire spectrum of equity investments, for various reasons: Lower costs, a much broader and deeper offering in terms of benchmarks, and the fact that over longer periods, the overall rate of success of active equity managers remains stubbornly low. In the broad emerging markets category, 32.9% of active managers beat their passive peers in 2024. This number falls to 27.4% over five years and further to 19.6% over a 10-year period.

At the end of September, 45.4% of total assets in the global emerging markets equity category were held in passive products, compared with 32% five years ago. In the first nine months of 2025, almost all inflows were attracted by passive funds: Out of EUR 11.6 billion collected, only EUR 45 million ended up in actively managed strategies.

Unsurprisingly, four of the five global emerging markets equity funds with the largest net inflows since the beginning of the year are passive funds.

Emerging Markets Are Outperforming Again

The Morningstar Emerging Markets Index has risen by 13.7% since the beginning of the year in euros, outperforming developed markets by 800 basis points.

In the third quarter alone, the Morningstar Emerging Markets Index rallied 9.4%, marking its best quarter since the fourth quarter of 2020, when it rose 15.6%.

This reversal in fortunes can be explained by a mix of macro tailwinds, valuation catch-ups, and sectoral leadership, delivering what many investors regard as a catch-up season for emerging markets.

“Firstly, emerging markets are significantly undervalued by global investors and, at the beginning of 2025, were trading at a discount of 40-50% compared to developed markets,” says Kunjal Gala, head of global emerging markets at Federated Hermes. “This is in addition to uncertainties about the trajectory of the US dollar, directly linked to President Trump’s trade and foreign policies, which represent a further factor favoring the prospects for a revaluation of emerging markets,” says Gala.

“We are also seeing a significant turnaround in investors’ sentiment toward lagging markets such as China and Korea, which in 2025 are up approximately by 40% and 50%,” he points out.

Besides, many central banks in emerging markets have benefited from greater flexibility in monetary policy thanks to slowing global inflation. Early rate cuts have supported both growth and investor sentiment.

The Best-Performing EM Equity Funds

Below are the 10 global emerging market equity funds that have performed best since the beginning of 2025. Strategies with less than £100 million in assets under management were excluded.

What’s Next for Emerging Markets Stocks?

“We think the EM equity rally can extend into the year-end as macro trends and capital inflows remain supportive,” Kamakshya Trivedi, chief foreign exchange and emerging markets strategist at Goldman Sachs Research, writes in a report released on October 10. Goldman Sachs Research predicts earnings from EM companies— which Trivedi says are likely to be the key driver of stock market returns in the near term— to grow 9% this year and 14% in 2026.

“Many emerging market companies are less vulnerable to international trade friction, a factor that increases their attractiveness in an uncertain global environment,” says Pierre-Henri Cloarec, portfolio manager at Nordea Asset Management. “What makes emerging markets attractive is not only their relative value, but also their role as home to some of the world’s most powerful long-term growth drivers. Sectors such as technology, healthcare, sustainability, and consumer goods are undergoing rapid transformation, fueled by the expansion of the middle classes.”

Although emerging markets remain sensitive to geopolitical risks, trade tensions, supply-chain disruptions and liquidity trends, Slabbert van Zyl, portfolio manager at Comgest, thinks that “long-term growth opportunities in developing markets remain unchanged,” as he continues to see “attractive prospects in sectors such as technology infrastructure, digitalization, and consumer goods.”