Where China and India set the pace in emerging markets for many years, investors are increasingly broadening their focus towards emerging Europe and Latin America. At the same time, a hard pivot to ex-China funds has proved risky, particularly because of timing.
For the first time in fifteen years, emerging markets outperformed developed markets last year, with returns of 17 per cent and 7 per cent respectively. “Investors with zero
exposure to emerging markets have been caught off guard,’’ says Naomi Waistell (photo), emerging markets portfolio manager at Carmignac. “It has put emerging markets firmly back on the map.’’
More than 30 billion flowed into EM equity funds over the past year. In 2024, inflows totalled just 0.3 billion, according to data from the Institute of International Finance.
Wim-Hein Pals, head of emerging market equities at Robeco, sees a clear pattern in investors’ return. “They first dip their toe in the water through a passive strategy to gain beta exposure. Only then do they look for active options to generate alpha.’’
Alongside this, another, more fundamental pattern is emerging. Where Asia absorbed the lion’s share of allocations for years, largely via heavyweights China and India, active managers are now explicitly looking to other regions to generate alpha.
Asian heavyweights out of favour
The reasons behind the shift are varied. India, long a favourite among investors, has become expensive. Although its price-earnings ratio has fallen from 25 to 20, it remains almost twice as high as the rest of the asset class, which trades at a PE of 11.5. Robeco is underweight India, with Pals (photo) expecting the country’s valuation multiple to decline to between 15 and 17 over the next twelve to eighteen months.
China faces a different set of challenges. Geopolitical tensions, ethical concerns and a sluggish economic recovery are keeping Western investors on the sidelines. China’s weight in the EM index peaked at 43 per cent in 2021 but has since fallen to 27.6 per cent. “Western investors are either very fearful or have largely exited China altogether,’’ says Carmignac’s Waistell. “We address that through bottom-up stock selection.’’ Carmignac is slightly underweight China in its EM portfolio.
Krishan Selva (photo), director and client portfolio manager at Columbia Threadneedle, still sees scope for a recovery in China. “Much of the stimulus has ended up in savings accounts rather than flowing into the equity market, as was the case in India. That impulse could still materialise in China, particularly given Beijing’s focus on supporting the stock market and boosting investor confidence.’’
Investors are more enthusiastic about Korea. The market delivered returns of more than 80 per cent last year as part of the so-called Korea discount was unwound. This discount — a structural undervaluation of Korean equities caused by weak corporate governance at large conglomerates and low dividend payouts — has long been persistent. Last year, the government launched the Corporate Value-up Programme to address the issue. Inspired by Japan’s reforms, the initiative aims to encourage higher dividends and increased share buybacks. Valuations nevertheless remain attractive. “Korea is trading at less than ten times earnings and plays a central role in the AI supply chain,’’ says Selva. Carmignac sees further upside potential for the Korean Kospi index. The Korean government has set a target of 5,000 points. Last week, the Kospi index stood at 4,586 points.
Ex-China funds
Although two of the three asset managers are underweight China, the market is too large to avoid entirely, according to Selva. Columbia Threadneedle has even been slightly overweight since early 2025. Selva describes ex-China funds primarily as a phenomenon that emerged during Covid, when China remained closed for longer and was widely regarded as uninvestable.
Robeco launched an ex-China fund in March 2024. The strategy currently manages €4.6m and is mainly used by US investors who are unable or unwilling to invest in China.
The timing of the launch of ex-China funds has proved unfortunate. Towards the end of 2024, Chinese equities came back to life — a rally that continued into 2025 following the breakthrough of DeepSeek. According to Selva, ex-China funds saw total outflows of $1.6bn last year.
Morningstar notes that more than two-thirds of ex-China funds have been launched in the past three years, which is too short a period to assess whether the strategy delivers. The fund research firm points to a historical pattern: asset managers often launch ‘ex’ strategies when the excluded market is bottoming out. For contrarian investors, that may actually represent a buying signal. Last year, China and the broader EM index delivered identical returns of around 17.6 per cent. Alongside broad EM strategies, Columbia Threadneedle also offers dedicated China and Latin America funds, though these attract less interest. “For most investors, broad EM exposure remains the most popular option,’’ Selva says.
Diversification benefits
All three asset managers believe emerging markets will offer renewed opportunities in the period ahead, provided investors adopt a more diversified approach. Carmignac recommends allocating at least 15 to 20 per cent to emerging markets, well above the benchmark weight of 11 per cent. “After fifteen years of underperformance, there is plenty of catch-up potential, valuations are attractive, and the diversification benefits are significant at a time when developed markets are being driven by a handful of technology stocks,’’ says Waistell.
The new favourites, however, are spread across the globe. In Latin America, attention is focused on Brazil, where elections in October could prove pivotal. “Markets are a little fatigued with Lula,’’ says Pals. “A centrist or more right-leaning government would already be well received.’’ Columbia Threadneedle and Carmignac are also overweight Brazil, anticipating falling interest rates, which could provide a boost to equities.
Robeco has also built positions in Chile and Peru. In Europe, Greece and Poland stand out. “Greek banks have become more disciplined because they were forced to,’’ says Selva. “As a result, the risk profile has improved significantly.’’