Emerging Markets at an Inflection Point: How AI and Digital Infrastructure Are Reshaping Global Investment in 2025

The 2025 Rebound: Why Emerging Markets Outperformed

After a prolonged period of underperformance relative to developed markets, emerging-market equities staged a decisive comeback in 2025. The MSCI Emerging Markets Index returned roughly 12% in local-currency terms, outpacing both the S&P 500 and the MSCI World Index, according to data from the VanEck Emerging Markets Equity Fund report published in January 2026. The rally was neither speculative nor fleeting—it was underpinned by a trio of durable catalysts: disinflation trends across key economies, a coordinated pivot toward accommodative monetary policy, and a surge in AI-led innovation that rewired the growth narrative for entire sectors.

Inflation, which had plagued many developing economies since 2022, finally decelerated to within central-bank targets by mid-2025. Brazil, India, and Mexico all saw headline inflation slide below 4%, allowing rate cuts that had been postponed for two years. The resulting liquidity injection flowed disproportionately into equity markets, particularly into companies with exposure to digital infrastructure and the energy transition. Asian markets, led by China and India, absorbed most of the capital, but the rebound was broad-based: Latin American tech hubs and select Middle Eastern exchanges also posted double-digit gains.

What distinguished the 2025 rebound from earlier cycles was the structural nature of the earnings growth. Traditional cyclical proxies—such as commodity exporters—were not the primary beneficiaries. Instead, companies riding the AI wave and digitalization trends delivered the strongest profit surprises. Cloud computing platforms, semiconductor design houses, and fintech firms in emerging markets reported revenue growth that exceeded their developed-market peers by an average of 6 percentage points. This divergence suggests that the rally was not merely a catch-up trade but the beginning of a longer-term re-rating driven by technology adoption.

[IMAGE: Performance chart comparing MSCI Emerging Markets Index vs S&P 500 and MSCI World Index for 2025]

China’s Tech Titans: Tencent, Alibaba and the AI Catalyst

Among the most prominent beneficiaries of the 2025 shift were China’s technology giants. Tencent, which accounted for 4.1% of VanEck Emerging Markets Equity Fund’s net assets, and Alibaba, at 3.0%, were major contributors to the fund’s outperformance. Both companies had spent the previous two years restructuring their businesses under regulatory scrutiny and macroeconomic headwinds. By 2025, those headwinds had largely dissipated, replaced by a renewed focus on artificial intelligence and digital infrastructure.

The launch of DeepSeek, a Chinese AI model that rivaled Western counterparts in benchmark performance, served as a catalytic event for the entire sector. Tencent integrated DeepSeek’s capabilities into its WeChat ecosystem, enabling AI-driven advertising optimization and content recommendation that boosted ad revenue by 18% year-over-year in the third quarter. Alibaba, meanwhile, deployed AI across its cloud division—Alibaba Cloud became the first Asian provider to offer full-stack generative AI services at a price point competitive with U.S. hyperscalers, winning contracts from regional governments and manufacturing firms.

The valuation narrative for Chinese tech has shifted fundamentally. For years, investors discounted these companies due to geopolitical risk and regulatory uncertainty. But the 2025 data suggests that the market is beginning to price in AI as a durable earnings driver rather than a speculative theme. Ola El-Shawarby, a senior portfolio manager at VanEck, noted in the fund’s commentary: “We remain constructive on China, with emphasis on high-quality companies benefiting from structural drivers in technology and AI.” The quote reflects a cautious but clear conviction that China’s tech ecosystem is entering a new phase—one where innovation, not just scale, commands a premium.

Beyond the two titans, a broader ecosystem of AI-focused startups and mid-cap firms in Shenzhen and Shanghai attracted global venture capital. Digital infrastructure—including data centers, fiber-optic networks, and edge-computing nodes—expanded rapidly, supported by government subsidies and a favorable regulatory environment for AI research. The result was a virtuous cycle: better infrastructure enabled faster AI adoption, which in turn drove revenue growth that justified further infrastructure investment.

[IMAGE: Logos of Tencent, Alibaba, and DeepSeek overlaid on a circuit board pattern]

India’s Valuation Reset: Consolidation, Outflows and the Cutting Cycle

If China was the star performer in 2025, India played the role of the consolidator. After a spectacular run in 2023 and early 2024 that pushed the Nifty 50 to a price-to-earnings ratio of over 25x—well above its historical average of 20x—Indian equities entered a period of consolidation. Foreign institutional investors pulled approximately $18 billion from Indian equities in the first half of 2025, driven by two factors: elevated valuations that left little room for error, and softer near-term economic data as GDP growth slowed to 5.8% in the April–June quarter.

The outflows, however, were not a signal of structural deterioration. India’s macroeconomic fundamentals remained robust: the current-account deficit narrowed, fiscal discipline held, and corporate balance sheets were healthier than at any point in the past decade. What the market needed was a reset in expectations—and that is precisely what the valuation compression delivered. By September 2025, the Nifty 50’s forward P/E had corrected to 19.2x, closer to its 10-year median.

The Reserve Bank of India had already begun a cutting cycle in early 2025, reducing the repo rate by 75 basis points to 5.75%. With inflation easing to 3.2%—within the RBI’s comfort zone—further cuts are expected in early 2026. Lower rates should reignite consumption and investment demand, particularly in affordable housing, automobiles, and small-cap manufacturing. For global allocators, the key question is whether the de-rating in India has created a buying opportunity comparable to what China offered two years ago.

The contrast with China is instructive. China re-rated in 2025 as AI innovation lifted tech valuations; India de-rated as early-cycle exuberance gave way to reality. But this divergence may prove temporary. Once India’s rate cuts feed through to earnings growth in the second half of 2026, foreign investors are likely to return. The structural story for India—demographic dividend, formalization of the economy, and digital public infrastructure—remains intact. The 2025 consolidation, therefore, looks less like a warning and more like a healthy pause.

[IMAGE: Line graph showing India’s Nifty 50 P/E ratio vs foreign institutional investment flows over 2024-2025]

The Under-Allocation Opportunity: Why Valuations Remain Attractive

Perhaps the most compelling argument for emerging markets in 2025–2026 is the persistent under-allocation by global institutional investors. Despite the rebound, emerging-market equities still account for only about 10% of global equity portfolios, well below the MSCI All-Country World Index’s emerging-market weight of roughly 12% and far below the 15–18% allocation that prevailed in the early 2010s. This gap is not accidental: geopolitical concerns, U.S. dollar dominance, and a preference for liquid developed-market assets have kept capital on the sidelines.

But the flip side of under-allocation is opportunity. With emerging-market equities trading at an aggregate forward P/E of 11.5x—a 35% discount to the S&P 500—valuations provide a meaningful margin of safety even after the 2025 rally. For long-term investors, the combination of discount valuations, improving earnings growth (consensus estimates point to 14% EPS growth in 2026 for EM), and under-weight positioning creates a favorable risk-reward profile.

Of course, no rally is without risks. Trade tensions between the U.S. and China could escalate again, particularly if the Trump administration reimposes tariffs on Chinese goods. A strengthening U.S. dollar—driven by hawkish Fed policy or rising geopolitical risk premia—would tighten financial conditions in EM and trigger capital outflows. Policy missteps in large economies, such as premature fiscal consolidation in India or a sudden regulatory crackdown in China, could also derail the recovery.

Yet these risks are priced in to a degree that makes the asset class resilient. The VanEck Emerging Markets Equity Fund’s portfolio construction explicitly accounts for such tail risks by emphasizing quality—companies with strong free cash flow, low leverage, and diversified revenue streams. “We are not betting on a single scenario,” the fund’s commentary states. “We are building a portfolio that can withstand multiple outcomes.” This philosophy is central to navigating an inflection point where reward potential coexists with real uncertainty.

[IMAGE: Pie chart showing global institutional asset allocation to emerging markets vs developed markets (2025 vs 10-year average)]

2026 Outlook: Supporting a Durable Shift or Just a Bounce?

As the calendar turns to 2026, the critical question for investors is whether the 2025 rebound marks the beginning of a multi-year structural shift or merely a cyclical bounce within a longer-term bear market for EM. The evidence leans toward the former, but with important caveats.

Supportive macro conditions are aligning in ways not seen since the early 2000s. Global interest rates are peaking—the Fed has signaled at least two cuts in 2026—and the U.S. dollar is showing signs of weakening after three years of strength. A softer dollar is historically one of the strongest tailwinds for emerging markets, as it reduces debt-servicing costs for dollar-denominated borrowers and boosts commodity prices. Meanwhile, the semiconductor upcycle is entering its expansion phase, benefiting Asian supply chains from Taiwan to Vietnam.

Innovation patterns are another pillar of durability. AI adoption in emerging markets is not limited to Chinese tech giants. India’s homegrown AI models, such as IndicBERT 2.0, are being deployed in agriculture, healthcare, and education, unlocking productivity gains in sectors that have historically lagged in technology penetration. Brazil’s fintech sector continues to expand, with digital payments now exceeding 80% of all transactions. These innovations are not speculative—they are generating real revenue and earnings, which in turn support higher valuations.

Risk assessment remains essential. Geopolitical flashpoints—particularly Taiwan, the South China Sea, and U.S.-China trade—could trigger sudden risk-off episodes. But the same could be said for any year. What has changed is the underlying quality of the earnings base. Emerging-market companies today generate higher returns on equity, carry less debt, and have more diversified revenue sources than they did a decade ago. This resilience is the key difference that makes the 2025 inflection point more durable than previous false dawns.

For investors looking ahead, the strategy is not to chase the rally but to build exposure gradually through diversified vehicles like the VanEck Emerging Markets Equity Fund, which offers exposure to high-quality names in China, India, Taiwan, and Latin America with a disciplined valuation-aware approach. The under-allocation opportunity, combined with supportive macro and innovation trends, suggests that 2026 could be the year when emerging markets finally regain their role as a core portfolio component—not as a speculative bet, but as a structural source of growth.

[IMAGE: Sunrise over Shanghai and Mumbai skylines with digital nodes connecting across a world map, symbolizing the inflection point]