An Inflection Point for Emerging Markets

An Inflection Point for Emerging Markets

Emerging Markets’ (EM) path could remain uneven and country specific, however, the current environment may offer an attractive entry point for investors. 

After several years of volatility, emerging markets are poised at the threshold of a new growth cycle. The macro environment that once constrained EM performance, including tight global liquidity, elevated U.S. tariffs and pandemic aftershocks, has begun to ease. In their place, a more constructive alignment of trade, monetary conditions and innovation is forming. Meanwhile, large EM economies such as China, India, Indonesia and Brazil are turning inward to stimulate consumption and rebalance growth toward domestic demand. Together, these shifts suggest that emerging markets could again become a leading engine of global growth in the second half of the decade.

If so, that transformation will have been a long time in the making. The last several years have been marked by geopolitical friction and economic fragmentation, and these dynamics weighed heavily on EM exporters and manufacturing hubs. Today, however, there are signs of détente. U.S. policy discussions have moved toward managed competition rather than confrontation, and tariffs on select Chinese goods have been rolled back. That easing—assuming it lasts—provides valuable breathing room for global trade volumes to stabilize and for supply chains to normalize.

For emerging markets integrated into Asian manufacturing networks, this reduction in trade uncertainty represents material relief. Moreover, the regionalization of supply chains—once a defensive response to U.S.–China frictions and to the risks exposed by the COVID-19 pandemic—has evolved into a new growth platform. Countries such as Vietnam, Malaysia and India are now embedded in diversified “China-plus-one” production strategies, gaining exposure to higher-value components, logistics and digital infrastructure. We believe that EM trade growth is set to recover in a more balanced and resilient configuration than before. 

The rise of artificial intelligence (AI) marks a new productivity cycle. Asia sits at the centre of this ecosystem—from Taiwan’s advanced chip foundries and South Korea’s memory producers to India’s software services and Southeast Asia’s expanding data-centre networks—positioning the region to capture both manufacturing and digital value creation. At the same time, China is also emerging as a powerful driver of this transformation. Its domestic AI innovation ecosystem has surged, with applications spanning manufacturing automation, consumer marketing, logistics optimization and healthcare diagnostics. In fact, the level of excitement across local enterprises and investors recalls the digital boom of 2017, when China’s online platforms and fintech sectors transformed daily life. Today’s AI wave feels similar—an inflection point where technological adoption and productivity gains could again redefine China’s growth trajectory. If successful, this rebalancing could make China’s growth less volatile and more sustainable, with spillover benefits for the region’s consumer-goods and technology sectors. 

For investors, the diffusion of AI-driven productivity across EMs suggests a structural growth opportunity, offering sustained earnings momentum as corporates harness AI to offset rising labour costs and demographic pressures. At the same time, Asia’s leadership in AI hardware, software and applications positions it as the strategic core of global innovation. The resulting productivity dividend could become the single most important differentiator between EM growth in the 2010s and in the late 2020s—ushering in a new era of competitiveness reminiscent of Asia’s manufacturing surge two decades ago. 

After the U.S. Federal Reserve’s historic tightening campaign, global financial conditions had constrained EM capital flows and currencies. But with inflation cooling across advanced and developing economies, central banks are easing again. The Organisation for Economic Co-operation and Development (OECD) expects inflation across G20 emerging markets to fall from roughly 4% in 2025 to about 3% in 2026. For EM policymakers, this marks the return of flexibility. Brazil, Chile and Indonesia have already begun easing cycles, while others are preparing to follow. Historically, EM equity markets have tended to outperform during synchronized easing cycles as credit growth and consumption strengthen valuations. As developed-country central banks slow quantitative tightening and the U.S. dollar stabilizes, EM currencies should find firmer footing—supporting portfolio flows that have been largely absent since 2021. 

Emerging Markets: Synchronized Easing Cycle Expected to Continue as Growth Slows, Inflation Subsides in 2026.

Source: AGF Investments using data from the Organisation of Economic Cooperation and Development (OECD), September 2025

A defining structural trend across EMs is the deliberate pivot toward internal demand. After decades of export-led growth, policymakers in major economies are prioritizing domestic consumption and social infrastructure. China is reorienting its policy framework toward services, household spending and technology upgrading. While China’s headline GDP growth is targeted at just below 5%, its composition is shifting toward retail sales, e-commerce and green technology. Beijing’s 2026–2030 Five-Year Plan aims to curb wasteful competition and overcapacity by promoting industrial upgrading, innovation and fairer resource allocation, which should help shift the economy from low-efficiency, quantity-driven growth toward high-quality, sustainable development and improved profitability.

India, with projected real GDP growth of 6.5–7%, remains the world’s fastest-growing major economy. Growth slowed in 2025 amid weaker consumer spending and trade frictions, but fiscal stimulus and a surprise reduction in the goods and services tax, as well as progress toward a U.S.–India trade deal, have improved sentiment. India’s young demographics, expanding digital economy and sound macro management are core strengths. The government’s focus on digital infrastructure and manufacturing incentives is fostering a vibrant ecosystem spanning electronics, pharmaceuticals, renewable energy and AI services. Rising incomes and urbanization are also driving a broad trend toward domestic consumption, creating one of the most attractive consumer markets globally. 

Beyond domestic reform, emerging markets are pursuing new forms of international cooperation. India, for example, is vigorously negotiating trade agreements, as is Brazil. These initiatives could enhance market access, reduce tariff uncertainty and integrate EM economies into new supply chains—reinforcing a broader trend of reduced dependence on a single Western anchor. 

This convergence of forces paints an optimistic picture for EMs, but risks remain. A renewed surge in U.S. inflation or trade tensions could strengthen the U.S. dollar and squeeze EM liquidity. Commodity-price spikes or reform fatigue in China or Brazil could slow progress. And while AI offers extraordinary potential, its benefits will be uneven; countries lacking digital infrastructure or skills may struggle to capture them. In short, while the balance of risks has improved, EM’s path will remain uneven and country specific. 

For EM investors, however, the current environment may offer an attractive entry point. Inflation is contained, central banks have room to cut rates, and the earnings outlook is robust. Corporate profit growth is expected to be in the low double digits for 2026, supported by both top-line expansion and improving margins. Valuations remain attractive relative to the U.S. and Europe. Importantly, EM composition has evolved: technology, pharmaceuticals and digital consumer platforms now dominate indices, replacing banks and commodity exporters, and a rising share of EM revenues derives from AI-related sectors. The current environment is looking like the early stages of a long-term re-rating, where innovation and productivity gains are redefining what investors expect from developing economies. 

As 2026 approaches, the narrative around emerging markets is shifting from cyclical rebound to secular opportunity. Years of underperformance, political volatility and capital flight are giving way to improving governance, credible policy frameworks and technological leadership. If the present trajectory holds, the next phase of EM expansion may be less about recovery and more about reinvention. Emerging markets, once viewed merely as a high-beta expression of global growth, are increasingly becoming the growth story itself.