Phil Langham, Head of Emerging Market Equities at RBC Global Asset Management, joined Alissa Howard, Institutional Portfolio Manager, to discuss the potential turning point for emerging market equities after many years of underperformance.
Langham notes that emerging market (EM) equities have had long cycles of outperformance and underperformance relative to developed market equities over the last 35 to 40 years. Over the last 12 years, developed markets have posted much stronger performance than emerging markets. However, the tide might be starting to turn, with emerging markets outperforming developed markets, roughly 25% to 15%, in the first three quarters of 2025.1
Langham lists a number of important drivers for these performance cycles, with the two most important being earnings growth and the value of the US dollar. Earnings growth has been relatively flat over the last decade, with a pickup in the last two years, with estimates of earnings growth of approximately 20% and 15% in 2025 and 2026, respectively. This increase in earnings growth is likely to be supported by margin expansion. As the value of the dollar weakens, the performance of emerging markets tends to strengthen. Large fiscal deficits and Trump’s weak dollar policy are likely to continue to suppress the value of the dollar relative to other global currencies.
The US tariff policies have become clearer over the last six months, with most emerging markets having negotiated deals, with the notable exceptions of China, India, and Brazil. Most emerging market countries will face tariffs of roughly 15% to 20%, similar to those settled in most developed markets, but much higher than prior rates, averaging 2.5%. Langham believes there is a strong chance that the US and China will reach a tariff deal in the fourth quarter, which would likely be very encouraging for markets. Most emerging markets sell less than 10% of GDP to the US, with China below 2.5%, but Mexico is much more dependent on the American market. Over the last 15 to 20 years, the portion of exports from one EM country to another has steadily increased to almost 50% today, significantly reducing their dependence on developed markets. As a result, increasing US tariffs are not likely to have a broad negative impact on EM exports. Most economists believe that tariffs will largely be paid by US consumers rather than exporting companies, serving as an additional tax on consumption.
After underperforming for the last ten years, emerging market equities look cheap on a valuation basis, with improving quality of earnings over time. Conversely, today’s valuation levels of US stocks should caution investors regarding potentially lower future returns. EM exposure to the commodities sector has declined from 45% to 10%, with consumer, technology, and other growth sectors becoming larger parts of the equity markets. Technology stocks are exhibiting strong and high-quality earnings growth, with companies contributing to AI and data center buildouts earning very high returns, but with much lower multiple expansion than experienced by the large US tech companies. Langham warns that a slowdown in AI and data center capital expenditures could make high-multiple stocks vulnerable to price declines. Langham believes it may be prudent to reduce risk in high-multiple tech companies and rotate into companies that will experience productivity growth due to the large investment in new AI technology.
Resources:
Fall 2025 Emerging Markets Outlook
1When referring to emerging markets (EM) performance and characteristics, we generally mean the MSCI Emerging Markets Index; when referring to developed markets (DM), we generally mean the MSCI World Index.
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