CONTRIBUTORS
Dina Ting, CFA
Head of Global Index Portfolio Management,
Franklin Templeton ETFs
It’s that time of year again. Holiday shoppers know the secret: start with a meaningful primary gift that makes an impression. Add smaller delights for a personal touch. Asset allocators can do the same—anchor portfolios with a broad emerging market (EM) core and use dynamic tilts1 for the perfect stocking stuffers.
The broad EM equity rally has now entered a more structurally supportive phase rather than a pure sentiment bounce. EM equities have advanced for 10 straight months, now up more than 30% year to date, outpacing US large caps, which returned slightly less than half that over the same period.2 We believe this outperformance is likely to continue through year‑end amid a weaker US dollar, improving earnings and growing demand for geographic diversification.
Valuation gaps remain wide: EM equities recently traded at nearly a 40% discount versus US peers—one of their lowest forward price-to-earnings (P/E) differentials in over a decade. Meanwhile, early macro indicators suggest modest expansion among EM manufacturing sectors.
EM vs. US Forward P/E Ratios (10-Year Range)
December 30, 2014–October 31, 2025
Sources: FactSet, MSCI, FactSet Market Aggregates. Next 12 months (NTM) P/E: MSCI EM Index Premium/Discount over MSCI USA Index. The MSCI EM Index is a free float-weighted equity index. The MSCI USA Index is designed to broadly and fairly represent the full diversity of business activities in the United States. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
Adding to this tailwind, the recent decline in the US dollar is easing financial conditions across EMs. The weaker greenback makes it cheaper for EM borrowers to service dollar-denominated debt, while the Federal Reserve’s pivot toward interest-rate cuts is fueling renewed demand for local-currency bonds that still offer attractive real yields.
Meanwhile, deepening trade and manufacturing linkages between the United States and Mexico underscore how supply-chain rerouting is boosting multiple EM hubs—not just one market—reinforcing the case for a broad EM core. These forces of less dollar pressure, falling US rates and stronger regional trade flows are creating what we see as a more favorable backdrop for EMs.
In terms of portfolio construction, a diversified EM allocation anchors exposure to global easing, demographic growth and digital transformation, while selective country tilts reflect conviction-driven opportunities. Such an approach helps investors look beyond short-term noise and stay invested through the macro cycle. With valuations still moderate, we believe the risk-reward for EMs broadly remains compelling.
Why broad core + dynamic tilts works now
Global supply-chain remapping triggered by tariffs has created more stark standouts and laggards across the EM universe and we believe a broad EM core can help capture the multiplicity of growth vectors, while dynamic tilts allow investors to capture standout growth pockets when dispersion widens. South Korea’s equity market, for example, has emerged as a clear leader this year, up nearly 70% year-to-date—the strongest returns for any major market globally.3
This surge has been powered by a combination of AI-driven demand for memory chips, foreign-investor inflows returning after years of under-allocation, and corporate-governance reforms that are helping erase the long-standing “Korea discount.”4
Country Contribution to EM Index Returns (Rolling 12 Months)
2019–2025 YTD
Source: Bloomberg, as of October 31, 2025. Bloomberg Emerging Markets Large & Mid Cap Index, Total Return, USD. The Bloomberg Emerging Markets Large & Mid Cap Total Return Index is a float market-cap-weighted equity benchmark that covers the top 85% of market cap of the measured market. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
By contrast, China’s contribution has moderated, reflecting slower post-COVID 19 normalization and softer capital inflows. Based on estimates derived from the Brookings/Haver Analytics dataset covering 25 EMs, China’s share of total EM portfolio inflows appears to have fallen—from roughly 40%–50% before the pandemic to below 20% by mid-2025.5 This indicates a reallocation of capital toward faster-growing, reform-oriented economies such as India, Mexico and Brazil.
Nonetheless, we believe Beijing’s support of the country’s real-estate sector and injections of liquidity into its equity markets have been notable. Its leaders have adopted a more measured, targeted stance in supporting businesses and consumers, while gradually rebuilding investor confidence. Additionally, the contribution to returns from China—which holds the largest weighting at 32% vs. 10% for South Korea—within emerging market indexes has turned positive, adding 9.3% year-to-date through October 31, 2025.6 This suggests that improving earnings sentiment and valuation support are beginning to reassert China’s role within the broader EM complex.
In markets, as with the holidays, balance matters: A broad EM core potentially provides staying power, while thoughtful tilts can deliver the finishing touch. Together, we believe this approach may help investors turn dispersion into opportunity for the year ahead.
Endnotes
- Dynamic tilt is an investment strategy that systematically adjusts asset allocation to favor factors or assets that are expected to perform well based on current market conditions, rather than based on a static, long-term allocation.
- Source: Bloomberg, as of November 14, 2025. EM equities measured by the FTSE Emerging Index; US large caps measured by the S&P 500 Index. The FTSE Emerging Index provides investors with a comprehensive means of measuring the performance of the most liquid large- and mid-cap companies in the EMs. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- Source: Bloomberg, as of November 9, 2025. The Korean Composite Stock Price Index (KOSPI) is a series of indexes that track the overall Korean Stock Exchange and its components. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- The Korea discount is the phenomenon where South Korean companies are valued lower than their global peers due to various factors like poor corporate governance, weak shareholder returns and geopolitical risks.
- Source: “Trends in global capital flows to emerging markets.” Brookings Institution. November 5, 2025.
- Source: Bloomberg. The Bloomberg EM Large & Mid Cap Total Return Index is a float market-cap-weighted equity benchmark that covers the top 85% of market cap of the measured market. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
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