After years of lagging behind their developed counterparts, emerging markets have seized the spotlight in 2025, delivering robust gains under challenging conditions. Investors weary of stagnant returns are suddenly witnessing a renaissance of growth across Asia, Latin America and Central Europe. While global trade tensions and geopolitical headwinds persist, a handful of dynamic economies have proven their resilience, rewriting the narrative on what it means to invest beyond the traditional safe havens.

This article explores the forces propelling emerging markets forward, highlights the standout performers, and offers practical strategies for building a portfolio that captures this momentum while managing risk.

Global context: headwinds meet surprises

The MSCI Emerging Markets IMI Index rose approximately 1.7% in Q1 2025, outpacing developed markets for the first time in several years. Year to date, emerging markets are up +6.2%, compared with about +1.0% for developed equities. That represents a remarkable divergence in performance amid continuing challenges such as supply-chain disruptions, rising interest rates and renewed US–China rivalry.

Key macro and policy factors shaping the landscape include:

• The new reciprocal tariff framework imposed by the United States, which has injected short-term volatility but also accelerated domestic stimulus measures in export-dependent economies.
• Ongoing geopolitical risks from US–China tensions and regional conflicts, prompting investors to favor resilient, domestically oriented growth opportunities over pure export plays.
• Central banks in several EMs maintaining accommodative stances to support growth, even as developed economies tighten monetary policy.

Leaders of the pack: China, Brazil and Poland shine

Within this diverse universe, three markets have captured global attention with their standout performances:

China’s equity market has been propelled by policy measures aimed at fostering innovation, especially in AI and digital services. Tech giants such as Tencent and Alibaba rebounded sharply, supported by fresh stimulus and a pivot toward domestic consumption and high-value manufacturing.

In Latin America, Brazil’s recovery has been fueled by rising commodity prices and improved fiscal metrics, while strong investor sentiment toward Mexican equities reflected a rebound from last year’s selloff. Meanwhile, Poland’s astonishing 35% YTD return underscores the appeal of certain Central European markets with solid fundamentals and EU-driven investment flows.

Divergence within emerging markets

Not all emerging markets have fared equally well. Investors must navigate a terrain marked by stark dispersion:

• India posted a -3% Q1 return as profit-taking followed its stellar 2024 rally and economic growth eased.
• Taiwan slipped -13% amid a global technology sell-off, weighing on semiconductor giants like TSMC.
• Thailand’s market fell nearly -12% YTD, reflecting a broader slowdown in regional tourism and trade.

This divergence highlights the critical importance of selectivity in emerging markets. Broad exposure may dilute gains if underperforming regions offset the leaders.

Sector leadership and stock selection

Sector performance in Q1 displayed clear winners and losers. Consumer Discretionary and Communication Services each returned +13%, largely driven by Chinese demand, while Information Technology declined -9% amid US tech headwinds.

Top individual contributors included:

• Tencent (China, Communication Services)
• Samsung Electronics (Korea, Information Technology)
• TSMC (Taiwan, Information Technology)
• HDFC Bank & ICICI Bank (India, Financials)
• Alibaba Group (China, Consumer Discretionary)

Investors seeking exposure should focus on companies with strong balance sheets, pricing power and leadership positions in high-growth domestic markets. Conversely, sectors highly reliant on global trade may remain susceptible to policy shifts.

Practical strategies for investors

To harness the growth opportunities while managing risks, consider the following guidelines:

• Emphasize diversification across regions and sectors to mitigate the impact of localized shocks.
• Allocate to high-quality names in resilient industries, such as consumer essentials and select financials.
• Monitor currency trends and consider hedging if local currencies face significant volatility.
• Stay updated on policy developments, especially trade measures and central bank decisions.

Regular portfolio rebalancing can help capture gains from outperformers while trimming exposure to laggards, preserving gains and controlling risk.

Looking ahead: balancing optimism and caution

Although the trajectory for emerging markets in 2025 looks promising, uncertainty remains. Trade tensions could flare, geopolitical flashpoints may emerge, and global monetary conditions will evolve. Yet, the recent performance has demonstrated that with disciplined selection and risk management, investors can tap into substantial growth potential that contrasts sharply with the modest returns of developed markets.

As investors, it is essential to maintain a long-term perspective, embracing both the volatility and the upside that these dynamic economies offer. By combining macro insight with on-the-ground research, one can identify the themes and companies best positioned to thrive.

Emerging markets are no longer the underdogs of the global equity universe—they are the engines of innovation and growth. With a thoughtful approach, investors can participate in this transformative journey, capturing the rewards of diversification and the excitement of new frontier opportunities.