Emerging markets: Cheap, growing and underowned

Emerging market (EM) equities, as measured by the MSCI Emerging Markets Index, had a very strong 2025, outperforming developed markets by a considerable margin. That strength has continued into 2026, and in my view, we are at the start of an era of outperformance for EM stocks. EM equities are coming off a low base. Historically, they have had very long—often decade-long—cycles of outperformance.

Earnings-per-share (EPS) growth could fuel EM outperformance

One reason for my bullish outlook today is faster EPS growth. Stock prices have historically followed earnings, and EM earnings are now growing faster than developed markets earnings.¹ The decade of 2014-2024 serves as a recent example of how EPS growth can affect stocks. It was a disappointing period for EM equities because EPS was stagnant in EMs. In 2014, EPS for the MSCI Emerging Markets Index was about US$80—and it was about the same 10 years later. In contrast, during the same period, S&P 500 earnings doubled, from approximately US$110 to US$240.

That decade of underperformance was the result of a perfect storm for EMs—a strong dollar, an unwind of China’s growth, companies issuing lots of stock, and contracting margins. But we believe the future will be different from the recent past. Although no one can predict the future, over the next two years, EM EPS is forecast to grow approximately 60%, while US earnings are forecast to grow approximately 30%.²

The power of fundamental momentum

One notable theme that we see driving EMs is earnings revisions. This is core to our process—fundamental momentum is the most powerful factor in EMs. For example, a month ago I was in Brazil, where we’re seeing significant upward earnings revisions. The economy is benefiting from strong material prices, but consumers are under pressure from interest rates of 15%.³ Fortunately, rates are beginning to fall, and that’s why we’re seeing rapid earnings revisions. There is no assurance that any estimate, forecast or projection will be realized.

One company we like is a US$20-billion-market-cap water utility. Today in Brazil, 35 million people don’t have access to running water, and 50% of sewage flows directly into rivers. The government has committed to universal access to water and sewage by 2033 and is investing approximately US$125 billion in capital expenditures. These are tangible, long-duration infrastructure investments with real social impact. We visited the company’s water treatment plants and met with management.

Company management is converting the firm from a state-owned enterprise to a privately run business and is rapidly cutting costs. Earnings estimates are up 20% this year for this company.⁴ At the aggregate level, data for EMs is showing the fastest earnings growth revisions on record. And we are seeing sharply higher revisions in Brazil, South Korea and Taiwan.

The opportunity in South Korea

I recently traveled to South Korea for research on nearly all of our holdings in Seoul. The trip included a 200-mile-per-hour train ride across the country to visit Korea’s shipyards. Seeing the world’s largest ships up close, and the infrastructure required to build them, was mind-bending, even after my experiences visiting over 100 manufacturing facilities during the past 15 years.