Emerging markets are celebrating their 40th anniversary as an asset class amid a strong rally that started in early 2025, outpacing developed markets as profitability surged. This marks a major reversal of more than a decade of U.S. market dominance. Various indicators suggest a new multiyear growth cycle is underway and it appears more sustainable than past commodities-driven episodes.
In this white paper, we examine a third EM cycle, driven by structural changes. The leadership of semiconductor companies makes EM foundational to the AI revolution as well as the technology sector in general. Additionally, historic amounts of global capital expenditures are fueling opportunities beyond technology and AI in cyclical compounders and commodity cyclicals, while domestic defensives are operating with improved technology capabilities. These dynamics suggest that this cycle is broader, more resilient and fundamentally different from previous ones.
The pursuit of superior investment outcomes within EM revolves around fundamental research that leads to high-conviction holdings based on a long-term perspective — a view that we believe is as true today as it was in 1986, when Capital Group first began managing its first EM strategy.
KEY TAKEAWAYS
- Emerging markets (EM) have rallied since 2025, outperforming developed markets and signaling a third cycle — one driven by innovation rather than commodities.
- A push-pull framework helps explain EM capital flows, with inflows sustained by momentum and reversals triggered by crises. Today’s fundamentals point to greater durability.
- Structural compounders — high-value, less cyclical firms — define this cycle, but other segments remain undervalued with strong earnings prospects.
- While political and governance risks persist in EM, established frameworks can mitigate them, with active management historically proving most effective.
Rob Lovelace is an equity portfolio manager and chair of Capital International, Inc. He has 40 years of investment industry experience (as of 12/31/2025). He holds a bachelor’s degree in mineral economics from Princeton. He also holds the Chartered Financial Analyst® designation.
Jeff Garcia is an equity investment analyst who covers consumer discretionary and staples, financials, healthcare and information technology in Latin America, as well as small- and mid-cap companies in the U.S. as a generalist. He has 15 years of investment experience (as of 12/31/2025). He holds a bachelor's degree in management science and engineering from Stanford.
Kent Chan is an equity investment director with 34 years of investment industry experience (as of 12/31/2025). He holds a bachelor’s degree in political economics from the University of California, Berkeley.