After more than a decade of disappointment, emerging market equities mounted a strong comeback in 2025. The MSCI Emerging Equities Markets Index surged 33.6% last year, compared to a 21.1% gain posted by its developed markets equivalent. This was a remarkable turnaround from years of underperformance that saw the index drop over 40% from its peak in 2021 to its trough in October 2022.
As 2026 started, emerging markets looked set to continue the momentum from 2025. Before the surprise American/Israeli airstrikes on Iran on 28 February, the index was up around 15% for the two-month period. The index had since dropped 13.5% to the end of March, leaving it slightly down for the year-to-date.
Now, the question for investors is whether the outperformance has ended or whether emerging markets will resume their previously upward trend. Before we look at the implications of the war between the US/Israel and Iran, it is worth examining why emerging markets were back in favour in 2025.
Valuations, growth and the dollar
The investment case for emerging markets rests on three pillars. Firstly, compared to stocks in developed market indices, emerging market equities look more attractively valued, even if prices are high by historical levels. Emerging market equities trade at around 11.5 times forward earnings, a 40% discount to US indices.
This is compelling considering that emerging market stocks are not just about commodities and frontier markets. Taiwan, South Korea and China are home to some of the world’s most critical technology and semiconductor hardware companies. Compared to the rich valuations of the big tech stocks in the US, they offer AI infrastructure exposure at a lower cost.
Secondly, emerging markets continue to offer a strong structural growth story. The IMF forecast at the beginning of the year was that emerging market economic growth would outpace advanced economies by 2.4 percentage points in 2026. Even though that prediction pre-dated the war, emerging market economies remain, on average, in fairly good health.
Balance sheets across Asia and Latin America are in reasonable shape, central banks have built credibility through disciplined monetary policy, and fiscal positions are expected to stabilise through the late 2020s. Emerging markets, their governments and their central banks have matured considerably since the crises of the 1990s.
Finally, pre-war, the US dollar appeared to be set to continue its downward trajectory on the back of further rate cuts by the Fed. Dollar weakness has always been one of the most important tailwinds for emerging market assets. A weaker greenback reduces the cost of servicing dollar-denominated debt, boosts commodity export revenues and improves their performances when measured in dollars.
With active fund managers at near two-decade lows in emerging market allocations, even modest reallocation flows would provide a meaningful lift. Emerging markets with higher domestic interest rates relative to developed market counterparts (Brazil, Mexico and South Africa among them) stand to benefit as capital looks for better yields in their bond markets.
Iran: a key risk that cannot be ignored
All of that said, the war in Iran has derailed emerging markets’ bull run, at least for now, highlighting how vulnerable these markets are to geopolitical volatility, supply chain disruption, and, especially, risk-off sentiment.
Escalation and prolongation of the war in Iran would be materially negative for most emerging markets. Upward pressure on oil prices would be damaging for large energy and commodity importers from the Gulf such as China, Taiwan and South Korea, dampening their economic outlook and stoking inflation.
If the current ceasefire doesn’t hold or result in a more permanent end to the war, a global risk-off shift amid heightened geopolitical uncertainty would see investors head for safe havens and turn away from riskier emerging market assets. Lasting higher oil prices will fuel inflation, in turn leading the US Federal Reserve to hike interest rates. These factors would contribute to a stronger dollar, which in turn would be negative for emerging market assets.
The speed and nature of any resolution will be a key determinant of the emerging markets trajectory. Conversely, a war that reaches a conclusion within the next few weeks, accompanied by the permanent resumption of the secure passage of energy and commodities through the Strait of Hormuz, would restore risk appetite, while easing pressure on oil prices, global inflation, and emerging-market currencies. This would allow the underlying drivers of emerging market out-performance to reassert themselves.
Global emerging markets – a proxy for South Africa
It is worth noting that South Africa’s financial market’s performance is highly correlated to that of emerging markets in general. South Africa was among the best-performing emerging markets last year, but in the current global risk-off/sell-off, it has been among the weakest. This volatility underscores the benefits of a diversified emerging markets approach versus pure South Africa exposure.
A diverse emerging markets fund can function as a useful proxy for exposure to South African equities, but with important differences. It eliminates the sensitivity to the commodity cycle and the exposure to South Africa-specific currency and concentrated political risks that come with investing only in the JSE. Importantly, a much broader and superior set of opportunities, particularly within the technology sector in Southern Asia, offers a compelling alternative.
Our preferred solution: The Ninety One GSF Emerging Markets Equity Fund
As Dynasty, we have identified the Ninety One GSF Emerging Markets Equity Fund as our preferred offshore emerging markets vehicle. We have chosen an active manager over a passive ETF (Exchange-Traded Fund) because emerging market index trackers are inherently heavily weighted to China. This limits diversification and overexposes investors to the political risks of one large market. The Ninety One Fund has also consistently outperformed the emerging markets index, a notable difference versus developed markets, where it has proven more challenging to identify actively managed funds that consistently beat passive strategies over the longer term.
