Emerging Markets 2025 Rebound: AI, Digital Infrastructure, and Under-Allocation Signal Renewed Leadership
Introduction: The 2025 Rebound in Context
After years of lagging behind U.S. equities, emerging markets staged a decisive turnaround in 2025, outperforming both the S&P 500 and MSCI World Index for the first time in several years. The shift was not a fleeting reflex to cheap valuations, but a structurally driven rally powered by easing inflation, supportive domestic policies, and a surge in AI-led innovation across the developing world.
As Ola El-Shawarby, a portfolio manager at VanEck, put it: "Emerging markets rebounded in 2025 as easing inflation, supportive policy and AI-led innovation drove a durable shift toward renewed leadership." The comment captures the essence of what made this rebound different from prior EM rallies—it was rooted in earnings growth, not just liquidity flows.
In short, a combination of macro tailwinds and structural tech investments sparked a decisive turnaround. The MSCI Emerging Markets Index returned approximately 18% through the first three quarters of 2025, outpacing the S&P 500's 12% and the MSCI World's 11% over the same period.
[IMAGE: Chart comparing EM index performance vs. S&P 500 and MSCI World in 2025]
Key Drivers: AI, Digital Infrastructure, and Energy Transition
The earnings engine behind the 2025 rebound was unmistakably technology—specifically, AI, digital infrastructure, and the accelerating energy transition. Chinese tech giants Tencent and Alibaba led the charge, but they were far from alone. DeepSeek, a Chinese AI startup, stunned global markets early in the year by releasing a large language model that rivaled OpenAI’s GPT-4 at a fraction of the training cost, directly challenging the assumption that U.S. firms hold an unassailable lead in artificial intelligence.
This breakthrough had an immediate catalytic effect on Chinese tech sentiment. Tencent and Alibaba, which together represented 7.1% of the VanEck Emerging Markets Fund (4.1% and 3.0% respectively), saw their shares rally sharply as investors repriced the potential of Chinese AI. The broader digital infrastructure theme—cloud computing, data centers, and fiber networks—also attracted significant capital expenditure across Southeast Asia, India, and Latin America.
Beyond AI, energy transition investments provided a second pillar of growth. Emerging markets, particularly those rich in critical minerals such as copper, lithium, and rare earths, benefited from the global push toward electrification and renewable energy. Brazil, Chile, and Indonesia saw increased capex in mining and green hydrogen projects, while India’s renewable energy capacity additions accelerated.
[IMAGE: Infographic showing key EM tech companies and their AI/energy exposure]
Currency and Policy Tailwinds
A weaker U.S. dollar was one of the most powerful macro drivers of the 2025 EM rally. The DXY index fell roughly 7% from its 2024 peak, providing a direct lift to dollar-denominated EM returns and encouraging capital flows into local-currency assets. Historically, a declining dollar has been one of the most reliable signals for emerging market outperformance, and 2025 was no exception.
Meanwhile, inflation moderated across most major emerging economies. Brazil’s central bank, after a prolonged tightening cycle, began cutting rates in early 2025; India’s inflation fell within the Reserve Bank’s target band; and even Turkey saw a stabilization in price pressures. This allowed EM central banks to ease monetary policy, supporting domestic demand and corporate earnings.
The contrast with the U.S. Federal Reserve was stark. While the Fed kept rates elevated through much of 2025 in response to persistent services inflation, EM central banks had more room to cut. This divergence further incentivized global asset allocators to rotate capital into emerging markets—a trend reinforced by attractive carry in EM fixed income.
[IMAGE: Dollar index vs. EM currency index overlay chart]
Country-Level Performance: China vs. India
China and India, the two largest constituents of the MSCI Emerging Markets Index, told very different stories in 2025—yet both contributed to the overall positive outcome.
China delivered strong performance, driven primarily by its tech and AI-heavy sectors. The Hang Seng Tech Index surged over 25% in the first half of 2025, as DeepSeek’s breakthrough and regulatory easing reignited investor enthusiasm for Chinese internet stocks. Tencent’s WeChat ecosystem expansions, Alibaba’s cloud division growth, and regulatory signals that the three-year crackdown on tech was ending all supported sentiment. Additionally, Beijing’s fiscal stimulus measures—targeted at consumer durables and manufacturing upgrades—provided a tailwind for broader equities.
India took a different path. After a spectacular multi-year rally that had stretched valuations to extreme levels, Indian equities consolidated in 2025. The Nifty 50 index traded roughly flat through the first nine months of the year, but this consolidation came with a healthy valuation reset: the forward P/E ratio for Indian stocks fell from 24x to 19x, creating what many investors saw as a more attractive entry point. The Reserve Bank of India’s monetary easing and the government’s continued push for semiconductor manufacturing and digital public infrastructure kept the medium-term narrative intact.
Both countries also benefited from the ongoing shift in global supply chains. As multinational corporations diversified away from over-reliance on any single manufacturing hub, China’s advanced electronics ecosystem and India’s expanding electronics assembly sector both saw increased foreign direct investment.
[IMAGE: Side-by-side performance chart for China and India equity indices in 2025]
Valuation and Investor Positioning
Despite the strong rally in 2025, emerging market valuations remain compelling relative to developed markets. The MSCI Emerging Markets Index traded at approximately 14x forward earnings by mid-2025, compared to the S&P 500’s 21x and the MSCI World’s 19x. This valuation discount is even more striking when adjusted for the higher growth rates of many EM economies—a classic "growth at a reasonable price" opportunity.
Yet global institutional investors remain persistently under-allocated to emerging markets. According to VanEck’s analysis, the average allocation to EM equities among global pension funds and sovereign wealth funds sits well below benchmark weighting—one of the widest under-allocation gaps in decades. This disconnect between fundamentals and positioning suggests that the 2025 rally may have further runway. If even a modest portion of the trillions of dollars currently parked in U.S. and developed market equities rotates into EM, the re-rating could be substantial.
The under-allocation is partly a hangover from the “lost decade” of EM underperformance (2011-2021), partly a structural bias among investors who still view EM as a risky, beta-driven asset class. But the 2025 rebound demonstrates that when supported by earnings growth and innovation, EM can deliver alpha, not just beta.
[IMAGE: Bar chart showing EM vs. DM P/E ratios and institutional allocation percentiles]
Outlook and Risks
Looking ahead to 2026, the key question is whether emerging markets can sustain their leadership. The outlook hinges on several factors.
On the positive side, the structural themes driving the 2025 rebound remain intact. AI adoption in Emerging Markets is still in early innings: Tencent, Alibaba, and DeepSeek are building platforms that could transform productivity across industries. Digital infrastructure investment continues to surge, with 5G rollout, data center construction, and cloud migration accelerating in countries like India, Brazil, and Vietnam. And the energy transition—while facing political headwinds in some developed markets—continues to drive demand for EM-produced minerals and renewable energy capacity.
If these trends persist, EM could sustain outperformance through 2026 and beyond. The case for under-allocation to close is also a powerful structural argument for continued inflows.
However, several risks could derail the narrative. A reversal of U.S. dollar weakness—perhaps triggered by a more hawkish Fed or a global risk-off event—would disproportionately affect EM assets. Geopolitical tensions remain elevated: the Taiwan Strait situation, potential U.S. tariff increases on Chinese goods, and instability in the Middle East could all trigger sharp drawdowns. Additionally, China's property sector remains fragile, and any renewed stress there could spill over into equity markets. Finally, India's high valuation, even after the reset, still leaves it vulnerable to earnings disappointments.
For investors, the lesson of 2025 is clear: emerging markets are no longer just a commodity play or a passive beta bet. They are increasingly driven by innovation, digital transformation, and structural policy reforms. The under-allocation theme, combined with attractive valuations and genuine earnings growth, makes a compelling case for a strategic overweight. Whether that case holds through 2026 will depend on macro stability and the continued execution of EM’s tech and energy transition ambitions.