What are emerging markets and how can you invest in them?

So often the focus for Australian investors is on the opportunities on offer in the local sharemarket or those in the US. It's natural.

After all, many investors have a more intimate understanding of local companies, and given the sheer size and historical performance of US markets, they've also been hard to ignore.

It appears that Australian investors have been shifting their gaze further afield this year. In the first six months of 2025, wholesale trading platform AUSIEX reported that inflows to emerging market exchange traded funds (ETFs) were up 27.7% compared to the same period in 2024.

In fact, during April, May and June, AUSIEX data shows that emerging market ETFs were one of the most-purchased ETF segments of all.

Hugh Lam, investment strategist at Betashares, says that the renewed interest in emerging markets has partly been a result of the diminished enthusiasm for US shares.

"A weaker US dollar and policy uncertainty out of Washington in the first half of the year saw capital outflows from the US, and we've seen emerging markets take a bit of that."

"That weaker US dollar story is quite beneficial for emerging markets. If we think about why the dollar is weakening, this concerns rising fiscal deficits in the US around the One Big Beautiful Bill Act. And from a valuation perspective, the dollar is quite expensive compared to historical levels," says Lam.

Investors who have turned to emerging markets have also been rewarded with higher returns compared to developed markets - at least, in the first eight months of the year. "They [emerging markets] are up about 15% year to date, outpacing Australian equities, which are up about 12%," says Clive Maguchu, senior strategist at State Street Investment Management.

"Developed market equities, in general, are up about 8% to 8.5% this year."

What are emerging markets?

The term emerging markets may seem abstract. As Lam explains, it captures a host of countries with some shared economic attributes.

"We're talking about countries that are generally growing a lot faster than their developed counterparts, have faster population growth, a rising middle class and signs of urbanisation. A rapid rate of technology adoption is also a key characteristic of some emerging markets.

"These are countries that can offer structural growth opportunities that would not otherwise be found in developed markets."

Given their respective economies and populations, it will come as no surprise that China and India are the two largest emerging markets in the world. They often tend to dominate emerging market indices. For example, Chinese (29.2%) and Indian (16.8%) companies account for nearly half of the total weighting of the MSCI Emerging Markets Index.

"Beyond those two countries, there are other regions such as Latin America, which are growing quite quickly and also seeing urbanisation trends. Brazil and Mexico are great examples," says Lam.

"People may not know that South Korea is often considered an emerging market and is technically classified as one by MSCI. South  Korea does have a lot of characteristics of being developed, but it is in the emerging markets category."

Risks and opportunities

Like any particular asset class or sector, emerging market equities come with their pros and cons. As Maguchu explains, there are a couple of reasons why investors might want to consider adding an emerging markets allocation to their portfolios.

"Emerging markets offer access to high growth in some of these emerging economies. By our estimation, growth is going to average about 4% over the next couple of years, which compares very favourably to what we're seeing in developed markets - about a 1.5% growth rate.

"They also offer diversification to investors in developed markets, like Australia, where you get exposure to different economic cycles. When emerging markets are having positive times, things might not be going so well in Australia. So that can help your portfolio through different cycles."

There are also risks. Lam says that emerging markets have generally been overlooked because of the heightened risks associated with the lower trading volumes and lower number of securities issued.

"There's also currency risk. There have been various examples across different countries, but one that comes to mind is last year in South Korea when the president enacted martial law, which led to its currency depreciating quite rapidly against the US dollar."

These potential risks, Lam believes, are why investment diversification across a variety of emerging markets can be useful.

"You don't want to hold all your eggs in one basket. You don't want to put all your money in the Chinese stockmarket or in India or Brazil. Holding a diversified basket of these countries can help mitigate some of these risks."

A brighter outlook 

While emerging markets may have enjoyed a relatively strong start to 2025, the story hasn't been quite as rosy in years gone by. "In the past couple of years - actually, in the past decade - emerging markets in general haven't really performed to the same level as developed markets," says Lam.

"People in the industry even coined the term 'the lost decade' for emerging markets, because if you look back over the past decade, they've underperformed their developed market counterparts."

Looking forward, both Lam and Maguchu are bullish on the prospects of emerging markets in the short term and see them as offering greater value than their developed peers.

"Emerging markets offer really good value currently compared to most developed markets. You're talking about 20 x PE (price-to-earnings ratio) on average for developed markets and about 12-13 x PE for emerging markets," says Maguchu.

"There's also the fact that global investors have been, for a little while, underweight in emerging markets. When you start to put those two things together, there's still a bit of runway for investors to allocate a bit more into emerging markets."

Zooming in on the two largest emerging markets, Lam says that sentiment towards China has been improving.

"China has been a real standout performer this year. We've seen a lot of the technology names pick up due to the government embracing AI and technology as a strategic priority for their country, and there are also plans to put a halt to falls in property prices.

"With India, although it has had a little bit of a pullback recently, longer term, the structural story is still intact because you've got a very young population and a lot of infrastructure spending."

How can investors buy in?

There's no shortage of options for investors who are looking to gain exposure to emerging markets, though listed funds may arguably be an easier option to capture more of the emerging market than by purchasing individual company stocks - at least, from an accessibility perspective.

Given the breadth of the emerging markets sector and the number of countries covered, Maguchu argues that diversified funds may also be an option worth considering for retail investors who are looking to limit their investment costs and reduce risk.

"We're fortunate in Australia that the market is developed quite significantly to allow retail investors to get access to a number of emerging market opportunities.

"There's plenty of options available for investors, including individual country exposures. But we feel that the best way for investors to gain exposure to this asset segment is through ETFs that offer broad, diversified exposure to emerging markets at a reasonable cost and with good liquidity.

"We think an allocation to emerging markets should really be a consideration for most investors looking to have a diversified global portfolio."

Get stories like this in our newsletters.