For fifteen years, the case for emerging markets was a story told with conviction and rewarded with mediocrity. From 2010 to 2025, EM equities lagged developed markets by roughly 500 basis points annually. Advisors and investors who allocated to the category based on compelling growth narratives were, too often, left behind. Now, in a report published August 28, 2026, J.P. Morgan Private Bank's Global Investment Strategist, Weiheng Chen and Head of Investment Strategy, Asia, Joshua Lewin argue, in The New Strategic Investment Case for Emerging Markets1, that the structural forces driving this underperformance are dissipating, and new ones are pushing in the opposite direction.
The numbers are no longer ambiguous. EM equities outperformed developed market equities by more than 12 percentage points in 2025. Through the first half of 2026, EM equities have risen 24% versus 10% for developed markets. The central question Chen and Lewin set out to answer is whether this is a cyclical bounce or something more durable.
Their conclusion is unambiguous. "What we are witnessing, we believe, is not merely a cyclical rebound, but a broader structural shift," write Chen and Lewin. Emerging markets, they argue, are re-rating as the forces reshaping the global economy converge on precisely what these markets supply.
Unpacking the Underperformance
The diagnosis matters before the prognosis. Chen and Levin identify three culprits for the lost decade. First, EM indices were heavily concentrated in financials, energy, and materials — the old economy sectors — just as asset-light technology businesses came to dominate global equity returns. Second, economic growth consistently failed to reach shareholders. Despite GDP growth exceeding 5% annually between 2011 and 2025 for many EM economies, EPS growth across the EM universe was essentially flat at 0.5% annualized. Management teams prioritized market share, employment, or national policy objectives over shareholder returns. Equity issuance and related-party transactions diluted per-share value. China exemplified the disconnect most dramatically: years of high single-digit GDP growth paired with nearly flat equity market earnings, a drag amplified by China's weight exceeding 20% in major EM indices. Third, currency depreciation compounded the challenge for global investors, with the MSCI EM Index delivering approximately 8.4% annualized in local currency terms but only around 5.7% in USD.
Three Structural Changes
Chen and Lewin identify three forces now working in EM's favor. The first is supply-demand positioning in the AI era. Taiwan and South Korea occupy indispensable roles in the global semiconductor supply chain. A single Taiwanese fabricator produces the vast majority of the world's most advanced logic chips. South Korean firms dominate global high-bandwidth memory production, a critical bottleneck in AI training infrastructure. As the largest U.S.-based hyperscalers commit hundreds of billions in AI capital expenditure, revenue flows directly into these economies. Meanwhile, Latin America holds over 40% of global copper reserves and approximately 60% of known lithium reserves, positioning the region as a critical supplier of the commodities AI's physical buildout requires. Mexico has overtaken China as the leading exporter of advanced technology products to the United States, with U.S. imports from Mexico reaching approximately $140 billion in 2025 versus $60 billion from China.
The second change is improving corporate governance and capital discipline. In South Korea, a formal government initiative to address the "Korea discount" is encouraging companies to publish capital allocation plans, increase dividends and buybacks, and reduce cross-shareholdings. Since its introduction in late 2024, the Korea Value Up Index has outperformed the broader KOSPI by approximately 60%. In China, the "anti-involution" campaign is targeting destructive price wars and margin-eroding competition, nudging some companies toward profitability over market share.
The third shift is macroeconomic credibility. Average EM inflation has fallen below 4%. Fiscal deficits for the median emerging market have narrowed. Real policy rates are higher. Current accounts have swung into surplus. Reserve cover has roughly doubled. "Real interest rates in almost every EM economy now exceed those in the United States," Chen and Lewin observe, "providing sustainable carry and a buffer against capital outflows." This was, they note, "a luxury that would have been unthinkable for EM policymakers just a decade ago."
Beyond Equities, Beyond Perception
The transformation is not an equity-only story. Chen and Lewin make a pointed case for EM debt. The hard-currency EM bond market now spans $4.5 trillion across more than 70 countries. Sovereign yields are approximately 6%; corporate yields range from 6% to 8%. Net leverage for investment-grade EM debt sits at approximately 1.1x, below both U.S. and European peers. Default rates are running at just about 1.1% year to date. Despite these fundamentals, EM debt is "still viewed by many investors as financially fragile — a view that appears increasingly outdated." Private markets offer a further dimension: approximately 85% of Asian firms with more than $100 million in revenue are private, and Asia-Pacific buyout private equity has outperformed public markets by nearly double over the past decade.
Five Key Takeaways for Advisors and Investors
- EM outperformance is no longer purely speculative. The 2025 and 2026 return data is significant, but the underlying drivers — AI supply-chain positioning, commodity scarcity, and governance reform — suggest a structural rather than cyclical explanation.
- Country and sector selection is now paramount. EM is not a single trade. ETFs excluding South Korea, the best-performing EM country year to date, illustrate the cost of imprecision. Active implementation and diversification within EM matter more than ever.
- EM debt deserves a fresh look. With sovereign yields near 6%, corporate yields of 6% to 8%, low leverage, and falling defaults, the fixed income case rivals or exceeds the equity narrative for income-oriented portfolios.
- Governance improvements are measurable and investable. The Korea Value Up Index's 60% outperformance of the KOSPI since late 2024 is not theoretical. Japan's comparable governance-focused index has outperformed the TOPIX by nearly 100% since mid-2020. These are precedents, not promises.
- Under-allocation is the current risk. Cumulative fund flows into EM large-cap equities remain muted against the surge into U.S. equities. EM fixed income flows have been persistently negative. "Investor allocations remain anchored to the disappointments of the past," Chen and Lewin conclude, "leaving many portfolios positioned for a world that exists only in memory instead of the one that is now emerging."
Footnote:
1 Chen, Weiheng, and Joshua Lewin. "The New Strategic Investment Case for Emerging Markets." J.P. Morgan Private Bank, 28 Aug. 2026, https://privatebank.jpmorgan.com/eur/en/insights/markets-and-investing/the-new-strategic-investment-case-for-emerging-markets.
