Emerging Markets Hit Record Highs in 2025: How to Invest

Emerging markets have staged a striking comeback in 2025. After several years of mixed underperformance versus global and US equities, we see mounting evidence of a turning tide. Year-to-date, broad emerging markets are up 25.5% in US dollar terms, nearly double the S&P 500 Index’s 13% gain.¹ This month, the MSCI Emerging Markets Net Total Return Index soared to a new all-time high—its first since February 2021. For comparison, the S&P 500 Index has notched roughly 160 records over the same period (not a typo: 160%!).²

Investors haven’t been waiting for news headlines to finally proclaim a new record for the US$9.6 trillion index. They’ve already taken action in anticipation, pouring US$45 billion into emerging markets debt and equities in August alone—the most in almost a year, according to the Institute of International Finance.³ A weaker US dollar underpins broad optimism, but we think there is far more to it.

China is leading the charge, with Chinese equities also rallying to their highest levels since the Evergrande crisis four years ago—symbolically timed in late August with the developer’s delisting from the Hong Kong Stock Exchange, closing a difficult chapter. Several other forces have contributed to this performance, including targeted fiscal support, the technology revolution and a gradual improvement in consumer confidence.

India is expected to continue posting strong growth rates, fuelled by domestic consumption and an ambitious reform agenda. While its markets are currently suffering through a period of muted sentiment linked to US tariff policy uncertainty, the country’s long-term prospects remain excellent, in our view.

South Korea has been a standout performer so far in 2025. Korean equities are up more than 55% in US dollar terms, and 46% in local currency (KRW).⁴ The expected extension of the semiconductor cycle, newfound stability after last year’s martial crisis and government reforms aimed at reducing the infamous “Korea Discount” are some of the reasons for increased investor appetite.

At Franklin Templeton, we are proponents of a disaggregation strategy, whereby investors recognize and appreciate the differences of individual emerging markets and allocate as such. Asia ex-China and emerging markets ex-China have generated a lot of investor attention over the past few years, not necessarily because of diminished interest in the market, but because China was seen as so large and so idiosyncratic that it required a nuanced and flexible approach. In this model, asset allocation and macroeconomic variables are assumed to be the primary drivers of returns and risk. We are also aware, of course, of the fact that not all investors have the resources to disaggregate their holdings and prefer a more traditional approach. This is absolutely feasible, but in these cases, we prefer to focus on company fundamentals. For such investors, a rules-based ETF strategy that considers the quality and value characteristics of its constituents may be a compelling option.

We believe that a thoughtful, rules-based combination of factors can add stability to the portfolio and enhance the probability of sustainable alpha generation. Our approach rests on four proven pillars: quality, value, momentum, and low volatility. Quality and value—both fundamental factors—account for 80% of the composite score, whereas momentum and low volatility account for 10% each.

The top quartile of stocks in the universe (MSCI Emerging Markets) across these weighted factors are combined into a diversified portfolio. Beyond the stock selection, our approach also ensures diversification by capping each constituent at 1% at each rebalancing. This helps to control idiosyncratic, stock-specific risk and instead puts more emphasis on the aggregate factor tilts. The portfolio tends to display significantly better earnings and dividend yields, higher profitability, and slightly lower leverage, while deprioritizing growth names in favour of better valuations.

This conservative allocation can help smooth volatility and drawdowns and improve risk-adjusted returns. The rolling volatility of the strategy over 252 days has consistently been lower than its universe volatility, including during extreme market regimes like the COVID-19 pandemic, the Russian invasion of Ukraine in 2022 and the tariff panic earlier this year. At the same time, it achieved an excess return of 1.8% annualized over five years. Currently, the portfolio offers a discount of one-third in forward price-earnings (P/E) terms and price-to-book ratios, alongside a two-point dividend yield pickup (4.5% vs 2.5%).⁵