We’ve been through a period of some 10 – 15 years when the interest in emerging market equities was quite low and everyone was focusing on US equities – and it worked. However, something has changed over the recent past.
Claus Born, head of client portfolio management EMEA & Latin America at Franklin Templeton, says that it was not uncommon for him to receive questions from investors asking if they still really needed to invest in emerging markets.
“There were of course reasons for this, and the US did perform very well. However, at the beginning of last year, we saw a break in this thesis that a Trump presidency would automatically result in stronger equity markets. There was also the assumption in late 2024 that a Trump presidency would result in a stronger dollar and then we saw a weakening of the dollar in early 2025. This prompted investors to look for opportunities outside of the US and that’s when people started to look at emerging markets and that’s also when the performance of emerging markets started to improve,” he says.
He adds that if you look back at the nearly 40 years of history in emerging markets, times of a weaker dollar were always good for the absolute and relative performance of emerging markets. Even the trade war, which resulted in many negative headlines for emerging markets, didn’t really hurt the asset class according to Claus Born.
“Emerging markets proved to be more resilient than what people expected and went on an outperforming trend in 2025. So, there was a lot of surprise on many fronts and if you look back on the key beliefs that you could find in late 2024, they were all challenged and I think they resulted in a rethinking of many investors,” he says.
There’s been a lot of talk about the increased concentration in markets, with the US equity market taking up nearly 65 per cent of global indices, prompting investors to consider the need for a more diversified exposure. Claus Born says that it’s clearly visible in the numbers.
“If you look at the emerging markets allocation in the MSCI all country world index, it’s only around 11.5 percent – and the actual allocation by investors is half of that at close to six per cent. It’s moved a bit, but it remain well below the 10-year average and the 20-year averages for allocations to emerging markets. We’re seeing changes and we’re seeing more interest from institutional investors. Searches for emerging markets mandates have increased since the beginning of last year, and the trend has not reversed yet. In the past these would typically have been for the replacement of managers, but now we are also seeing investors increasing their allocations,” he says.
Asked if it’s too late to increase the allocation today, Claus Born says that you obviously never know.
“I think that when you’ve had a very strong performance in the market segment, investors automatically ask if this the end of the road – have I already missed the rally? You never know and the only thing we can do is make educated guesses. If I look at emerging markets, we see that the overall allocation is still low, which could provide more fuel to the rally going forward. Another argument would be the earnings momentum in emerging markets, which are expected to be higher than in developed markets. Overall, I think the combination of momentum, valuation and demand is still in place,” he says.
With China, India, Taiwan and Korea accounting for some 80 per cent of the EM benchmark, the question is if you simply need to get those markets right or if you need to find opportunities outside of that group. Claus Born says it’s a combination of both.
“You obviously need to get these markets right. We have an active, stock picking approach and we need to pick the winners to make a difference. There is a concentration, but what’s interesting in EM is that the commonalities between these four markets are relatively low. It’s a very eclectic mix of countries that we have here,” he says. He adds that the reasons for allocating to EM equities are no longer only to get access to a convergence story.
“Today there is one part of the story where we have an increasing tech component within emerging markets in South Korea, Taiwan and China. Then we have still the old convergence/consumption story in other parts of the market. If I look back at emerging markets to when I started in the early 2000s out of Latin America it was mostly about breweries, cement companies and banks – the old-fashioned and basic industries. It’s a very different market today. I also think we have all realised that the convergence story is not what we originally imagined. Everyone compared EM companies and sectors to the US and assumed that was the end goal. We have since realised that that didn’t work because habits, preferences of consumers are different all over the world. Even at a similar level of wealth, you don’t have the same spending pattern,” he says.
Claus Born adds that gaining this deeper understanding of individual countries is why it’s still important to have people on the ground in emerging markets.
“We started to build local offices in emerging markets some 30 years ago and the key reason was to gain better access to information. That reason is not as important today as access to information has improved significantly. Today it’s more about being able to put developments and business model into a local context. The engagement with companies and management from a sustainability point of view is also improved if you have a local presence because you can do it in a more culturally sensible way,” he says.
Asked about what clients and prospects are currently focusing on, Claus Born says that a lot of the questions tend to focus on day-to-day events. “Today it’s a lot of focus on the impact of higher oil prices and the impact from the war in the Middle East. There are also questions relating to Ukraine and the impact of the trade war on emerging markets. So, questions tend to be driven a lot by headlines, and with emerging markets the news reporting tends to be negative. I think this means that investors are focusing too much on the risks, which are obviously there, but these are risks that are relevant for the global economy. Sometimes I have the impression they are not focusing enough on the opportunities,” he says.
