After so many false starts, can emerging market equities finally provide investors with the opportunities and diversification they need in an environment of global uncertainty? Malcolm Dorson (Global X) and Jonathan Ramsay (Trellia Wealth Partners) examine the growth of emerging markets.
In recent times, emerging markets has been a tough market to invest in, having only outperformed the S&P 500 in two of the past 15 years. This has primarily been due to massive growth in U.S. mega-cap stocks, a strong U.S. dollar, and structural issues in key emerging economies, most notably China.
Not surprisingly, this has resulted in considerable negative sentiment in emerging market equities, which has led to a significant home bias for investors in developed markets, like Australia. But in the current market cycle, with developed market equities (particularly U.S. stocks) trading at historically high valuations and concentrated into a handful of names (Magnificent 7), along with a weakened U.S dollar, a dovish Federal Reserve, and renewed economic stability in China, the story around emerging markets is beginning to look attractive again.
This attraction for emerging markets rests on their potential for higher economic growth, driven by a range of factors, including favourable demographics, rising productivity, a rapidly growing middle class, and increasing domestic consumption. And against this backdrop, emerging markets also offer investors significant diversification benefits, low correlation with developed markets, attractive valuations, strengthening fundamentals, and substantial technological advancements.
By Jayson Forrest
Jonathan Ramsay
Partner & Portfolio Manager
Trellia Wealth Partners.
Malcolm Dorson
Snr Port Mngr Emerging Market Equities
GlobalX
Continued.....
“It’s a compelling argument for emerging markets,” says Malcolm Dorson — Head of the Active Investment Team and Senior Portfolio Manager for Emerging Market Equities at Global X. Speaking on the topic ‘Structural opportunities in emerging markets — India’ at the 2026 IMAP Portfolio Management Conference in Sydney, Malcolm believes emerging markets look appealing, particularly with the sector trading at a 45 per cent ‘multiple discount’ to the S&P 500.
He is particularly bullish on India, which has a market capitalisation exceeding US$5 trillion. India is also the fifth largest stock market globally, offering investors unique opportunities to tap into this emerging market.
In making the case for India, Malcolm points to a number of key factors as potential growth catalysts. These include strong secular growth based on attractive demographics, a market-friendly and democratically elected Government, structural reforms, capital expenditure to lift productivity, supply chain diversification, prudent monetary policy, and a rapidly growing middle class.
India is the best global demographic story. It has a young population and it’s expected to add about 25 per cent of the world’s working-age population. At over 1.4 billion people, India is also massive, having surpassed China’s population
Volatility: The new norm
When asked about market volatility, Danielle doesn’t believe volatility will come under control anytime soon, instead, saying: “This may be the new norm.” However, there is some good news. Despite stocks experiencing short-term volatility, over the long-term, Sands Capital points to three key fundamentals as part of longer term investment performance:
1. Earnings growth is the dominant driver of stock returns. If a company consistently grows its earnings above average rates, and in-line or better than market expectations, investors will eventually take notice and the stock will appreciate.
2. Concentration. A small number of businesses have created a disproportionate amount of market wealth. For example, from 2016-2019, just five companies accounted for almost one-quarter of net-wealth creation. Therefore, stock selection is critical.
3. Valuations. Valuation shifts create volatility in the near-term, but over time, they have limited impact on long-term returns — with valuation re-ratings and de-ratings cancelling each other out.
“We believe markets will remain volatile, but doing good bottom-up research, and focusing on growth potential, sustainability of competitive advantage, market leadership, and attractive business fundamentals, this should yield a small number of businesses that can be owned in a concentrated way over long time horizons,” says Danielle. “And the value from that earnings growth should be realised over time, despite the volatility.”
We believe emerging markets will account for nearly two-thirds of global growth in 2026, growing about 3x faster than developed markets. The MSCI Emerging Markets Index forward earnings per share (EPS) growth of 13.9 per cent compound annual growth rate rivals even the Nasdaq (at 14.9 per cent), but at half the valuation (11.3x vs 21.9x forward price earnings)
AI as a growth opportunity
When identifying stock opportunities in a volatile market environment, Sands Capital looks for growth businesses exposed to different earnings drivers and secular trends. One such thematic is artificial intelligence (AI).
Danielle doesn’t believe AI is a ‘bubble’, instead, saying the market is still in the early days of AI value creation — both for companies selling AI and customers using it. And while some stocks are significantly trading up, like Nvidia (up 1,200 per cent over the past five years), other stocks, like ASML and TSMC, are only trading at slightly double their price.
“We know there is a lot of demand for AI. You only need to look at the annual capex of hyperscalers (like Google, META, and Microsoft). There was a doubling in demand between 2024 and 2025 — from about US$240 billion to US$412 billion — which represents the time from the launch of ChatGPT to the release of DeepSeek, Gemini, Claude, and agentic AI,” says Danielle.
This year, capex spending on AI by hyperscalers is conservatively forecasted to grow by about 60 per cent to US$650 billion. Danielle has even recently heard some forecasts predicting US$850 billion, and over US$1.2 trillion by 2028.
To illustrate the growth and adoption of AI by major businesses, Danielle quotes Amazon CEO, Andy Jassy, who recently said: “The barrier to entry for building a complex software product has effectively dropped to $0. We saw a team within our logistics division rebuild a global routing engine in 14 days — a project we originally budgeted for 18 months and US$10 million.”
It’s a view supported by Joel Connell — Portfolio Manager at Bell Asset Management — who agrees the top five hyperscalers are predicted to spend well over US$600 billion this year on capex. However, he says while everybody is aware of the obvious beneficiaries of AI in the large cap space — like Nvidia and TSMC — there are also many great opportunities for investors in the small and mid caps (SMID) part of the AI supply chain sector. These include:
- Hoya — involved in developing semiconductor components for AI data centres.
- DISCO Corporation — a leading manufacturer of precision processing equipment used to cut, grind, and polish semiconductor wafers.
- Keysight — provides electronic design, emulation, and test solutions to accelerate innovation in industries like semiconductors.
- Fujikura — manufactures specialised, high-density optical fibre cabling and interconnection systems designed specifically for AI data centres.
- Emcor — provides critical physical infrastructure for AI, specialising in the planning, design, installation, and maintenance of data centre, electrical, and mechanical systems.
- Modine — a critical provider of thermal management infrastructure for AI-driven data centres.
“AI capex flows across multiple infrastructure layers, like connectivity and physical infrastructure, with many critical suppliers sitting in the global SMID universe,” says Joel. “These SMID companies are really benefitting from AI capex spend. And the interesting thing about all these companies (listed above) is they outperformed Nvidia in terms of their share price performance over the last 12 months. So, there are some great opportunities in SMID caps to leverage the AI thematic, which are well off the radar for many investors.”
When identifying opportunities, Bell Asset Management looks for companies with durable and sustainable competitive advantages, strong market positions, and long-term pricing power, while also being mindful of not overpaying for these companies.
“Valuations are important,” says Joel. “As an investor, in order to get paid, you just don’t want to buy good companies, you want to be buying companies trading at attractive prices. You have to be very diligent about what you’re buying for the longer term, and also the valuations you are paying. That’s because there are pockets of valuations that are getting quite excessive, which is something you need to be aware of.”
There are genuine investment opportunities in India around technology. India accounts for 49 per cent of the real-time transactions market, and it has the third largest startup ecosystem in the world, with more than 123,000 startups and a record 127 ‘unicorns’ worth more than a combined US$390 billion. Furthermore, with over 500 million consumers, India is expected to have the second largest cohort of online shoppers by 2030
Agentic AI: The new ChatGPT moment
And what about agentic AI? Danielle believes agentic AI is the new ‘ChatGPT moment’, but even more impactful. Agentic AI is the next evolutionary step in AI, where the technology is able to reason, self-learn, think about and check answers, execute workflows, make decisions, and report back to the user. Essentially, agentic AI is a digital worker.
“In our view, agentic AI makes a compelling case for more investment in this technology,” she says. “AI is likely to be the biggest change we see in our lifetime. It will change our world in ways we have only imagined and in ways we cannot even imagine yet.”
Sands Capital buckets companies likely to benefit from AI into three categories:
1. Enablers — those companies that provide critical infrastructure required to use AI, like semi-conductor providers, cloud providers, energy providers, and data centres.
2. Builders — those companies that create novel products and services, like data infrastructure, robotics, and autonomous systems.
3. Users — those companies that use AI to enhance existing businesses, like e-commerce, social media, personalised medicine, and cybersecurity.
In addition, Danielle says memory will be a major beneficiary of agentic AI. She expects the likes of Samsung Electronics, Seagate Technology, and SK Hynix to benefit from the increase in demand for memory, as AI agents (a software system that uses AI — typically large language models — to autonomously perceive, reason, plan, and take actions to achieve specific goals, rather than just generating text) increasingly supplement or replace workplace employees (knowledge workers).
However, she adds that the current undersupply of memory in the market is likely to be prolonged and exacerbated, as a result of the growth in agentic AI.
“AI agents live in memory. However, memory is at a choke point, because each AI agent needs more and more memory. At the same time, the number of AI agents is likely to explode,” says Danielle. “Today, we estimate there are less than 10 million agents, but if each knowledge worker got its own AI agent, that number would explode to 1 billion agents, which would expand total industry demand for memory by 20x.”
If an investor wants growth in their portfolio, much of that growth is probably going to have to come from emerging markets
The point of no return
Although we’re still in the early days of AI, Danielle believes we have past the point of no return. She says too many companies have already seen what AI can do for them in terms of efficiencies and improvements, which the wider population is also beginning to recognise.
“And while there still will be plenty of regulatory decisions to consider relating to AI, I am confident that no government wants to be disadvantaged in this race,” she says. “AI is real and it’s happening. With the stakes as high as they are currently in military and defence, anti-fraud and financial crime, and cyber threats, we believe governments are very interested in promoting AI technologies,” she says.
“AI will also be instrumental in advancements in medicine and disease, robotics, and an autonomous digital workforce. We can well be on the cusp of some very big improvements in our world as a result of AI. Naturally, we feel very confident about the growth trajectory of this space.”
Tom agrees: “We think the AI phenomenon is absolutely an economic event and not a bubble. And the data centre capex cycle we’re in at the moment is extremely likely to continue over the medium-term.”
However, he also believes there are still many pieces of the jigsaw that need to come together in how AI plays out, including from a geopolitical perspective. He also agrees there is the issue of regulation, and the extent to which governments will begin controlling the way in which AI is used in consumer applications, which needs to be considered.
“We’re also bullish on AI and believe this trend will continue,” says Tom. “However, we believe the companies that are likely to benefit from AI in the medium-term will become the secondary and tertiary beneficiaries of this trend as AI continues to improve. This will affect a wide range of businesses and solutions — from energy infrastructure to optical data networks, through to businesses implementing and controlling the governance around these types of systems — which investors need to be aware of.”
About
Malcolm Dorson is Head of the Active Investment Team and Senior Portfolio Manager for Emerging Market Equities at Global X, and
Jonathan Ramsay is Partner and Portfolio Manager at Trellia Wealth Partners.
They spoke on the topics ‘Structural opportunities in emerging markets — India’ and ‘ The unlikely haven — Why emerging markets may be the rational response to irrational prices’ at the 2026 IMAP Portfolio Management Conference in Sydney and Melbourne.