Emerging Markets Recovery: Drivers, Themes, and Risk Considerations (Dec 2025)

On December 7, 2025, ClearBridge Investments published an article on Seeking Alpha asserting a recovery in EM equities following a decade of underperformance [4]. The analysis is corroborated by internal data showing the iShares MSCI Emerging Markets ETF (EEM) delivered a 31.26% return from January 2 to November 14, 2025—aligning with the article’s claim of over 30% returns through mid-November [0]. The MSCI Emerging Markets Index (29.7% YTD as of Nov 28, 2025) also outperformed the MSCI World (developed markets) index’s 20.6% gain [3].

Drivers of the recovery include attractive valuations relative to developed markets [1][3], a weaker U.S. dollar [2], improved global growth prospects [1], and reduced EM inflation pressures [1][2]. Key investment themes identified by ClearBridge include: 1) China’s discounted high-quality growth stocks, 2) undervalued EM technology firms poised for earnings outperformance, and 3) India’s long-term demographic and economic strengths [4]. The article’s release reinforces existing positive sentiment, potentially fueling further short-term inflows into EM-focused funds [4]. A multi-year shift to outperformance could materialize if supportive macro factors persist, with EM tech and high-quality Chinese stocks leading the rally [4].

1. Sentiment Reversal After a Decade
   : The 30%+ returns mark a significant turnaround from EM equities’ long-term underperformance, signaling a potential structural shift in investor sentiment [0][4].
2. China and India as Dual Growth Engines
   : ClearBridge’s focus on these two largest EMs highlights their role as primary drivers of the recovery—with China’s discounted growth and India’s demographic advantages offering distinct investment opportunities [4].
3. Indirect Global Impacts
   : The EM recovery could benefit global commodity producers (from increased EM demand) and multinational companies with significant EM exposure, extending the impact beyond EM equities directly [4].

• Opportunities
  :
  • EM-focused ETFs (EEM, VWO) stand to benefit from increased inflows [4].
  • Undervalued EM tech firms and high-quality Chinese growth stocks may lead the rally [4].
  • India’s long-term demographic and economic strengths present structural opportunities [4].
• Risks
  :
  • A reversal in U.S. dollar weakness could negatively impact local-currency-denominated EM assets [1][2].
  • Geopolitical tensions (e.g., U.S.-China trade), political instability in key EMs, and regulatory changes (notably in China) may derail the recovery [4].
  • A slowdown in global growth or resurgence in inflation could weaken EM fundamentals [1].
  • Rapid gains may lead to overvaluation if not supported by earnings growth [4].

EM equities have delivered over 30% returns through mid-November 2025 (EEM: 31.26% YTD as of Nov 14, 2025 [0]), outperforming developed markets. Drivers include attractive valuations, dollar weakness, improved global growth, and reduced inflation [1][2][3]. Key themes from ClearBridge Investments include China’s discounted growth, undervalued EM tech, and India’s long-term strengths [4]. Decision-makers should monitor U.S. dollar movements, global growth forecasts, EM inflation data, and policy developments in China and India. While the recovery presents opportunities, risks such as currency volatility and geopolitical tensions require careful consideration.