‘We have catalysts lining up. Those catalysts are the US dollar and those catalysts are the earnings picture of the asset class,’ says Ninety One’s Varun Laijawalla
Emerging markets have spent the better part of a decade as the unloved corner of the global equity universe. But after a 35 per cent rally in 2025 and a string of macro shifts working in their favour, the asset class is forcing its way back into allocation conversations.
The question now is whether this is just a superficial movement or the start of something structural.
In a recent Ninety One webinar, hosted by Benefits and Pensions Monitor, Varun Laijawalla, co-portfolio manager in the 4Factor team at Ninety One, acknowledged how investors are no longer asking whether emerging markets deserve attention in theory. Rather, they’re asking whether the recent rebound marks the start of a more durable shift.
After years as the market’s “ugly cousin,” he said, emerging markets are back in the conversation because the backdrop that favored developed markets, especially the US, is changing.
“In a world where US exceptionalism is no longer exceptional, where does that marginal dollar go?” he said. “Emerging markets, for the first time in several years is part of that conversation and recent performance has certainly helped to spur some of these discussions.”
His case rests on three shifts. First, the US dollar may no longer be the same drag on emerging markets that it was for much of the past decade. A strong dollar has historically hurt EM because so many companies borrowed in US dollars, making debt more expensive when local currencies weaken. But with the dollar down last year and the current dollar cycle already long by historical standards, Laijawalla suggested investors need to think seriously about whether that headwind is fading.
He also argued that the core problem in emerging markets was not weak revenue, margins, currencies, or valuations, but net issuance, particularly in China. Large companies entered the benchmark at rich valuations, then derated sharply, dragging down index-level earnings per share.
That dynamic is now improving, Lailawalla noted, as Chinese companies return more cash through buybacks and dividends. He believes this is lifting the quality of the earnings profile across the asset class.
Moreover, valuations matter at this point because EM is unusually cheap relative to the US. Laijawalla stressed that valuations alone are not enough to justify a call, but they become powerful when paired with better fundamentals.
"We're in the eighth percentile of cheapness over the last 35 years," Laijawalla said. "I would never lead with valuations as a trigger to buy the asset class. But what I'm saying is we are at an extreme within an extreme. And number two, within that extreme, we have catalysts lining up. Those catalysts are the US dollar and those catalysts are the earnings picture of the asset class. And I think those are the key things to watch.”
According to Laijawalla, the obvious action in emerging markets right now sits in the technology names across Korea and Taiwan, but he views that trade as crowded. The more interesting setup, in his view, is India.
“India is so interesting because it's almost the AI hedge,” he noted. “There's over a billion people in the market and there's very little AI and therefore that market, whilst emerging markets was up 34 per cent last year, India was up a meager 6 per cent because there's very little AI. But people still need to buy shampoos. People still need to drink Pepsi. People still need to eat biscuits. So I think India, having grown into its valuation multiples one year hence, whilst earnings have grown and the multiple hasn't really moved. The setup looks particularly interesting.”
On the question of carving China out of EM, Laijawalla took a more neutral stance, noting the decision depends largely on the investor’s own view of China, whether driven by market assumptions or ethical considerations. A separate China allocation, in his framing, is useful because it allows investors to dial exposure up or down more deliberately rather than simply accepting the benchmark weight.
He’s more skeptical, however, about the idea that investors can improve outcomes by excluding selected countries or regions from the EM universe. He argued that country and regional calls are notoriously hard to make consistently, because leadership shifts quickly and often unpredictably. Markets that look like dead weight in one period can become top performers in the next.
To that end, Samantha Cleyn, head of institutional at Ninety One, raised the issue of risk perception, arguing that much of what investors believe about emerging markets is outdated. The asset class has long carried a reputation for high volatility and limited diversification, particularly among Canadian allocators who saw it as too similar to their home market.
"Historically emerging market equities has been viewed primarily as a return enhancing public equity asset class, commensurate with high volatility levels relative to developed markets," she said. “Additionally, at least historically from a Canadian investor's perspective, emerging market equities was viewed as having a very similar profile to our Canadian equity market and not offering as potentially as compelling a diversification benefit as other international or global regions.”
But the composition of the MSCI EM index has since shifted dramatically. Before 2010, it was BRICS-led, commodity-heavy, and cyclical. Over the past decade, technology and consumer companies across Asia have taken a larger share, and the index has become more concentrated.
As a result, correlations between EM and Canadian equities have improved to the point where EM now offers diversification "almost as diversifying as U.S. equities," she said.
Laijawalla argued that investors relying on a broad global benchmark to access emerging markets are barely touching the opportunity set. Emerging markets account for most of the world’s population and a majority of global GDP, yet they make up only a small share of the MSCI ACWI index. In practice, he suggested, the actual exposure is often even lower because many global equity managers run underweight positions to EM on top of that already limited index allocation.
For investors seeking both the market return and stock-specific upside from emerging markets, he said a dedicated global emerging markets allocation offers a far more complete way to access the asset class.
“Picking a country and a region, we think, is a difficult thing to do. We believe that the way to really generate the alpha and the beta is to give the manager the opportunity to have the broadest scope of companies and for them to do the stock picking around those companies,” he said.
