Quality in emerging markets: A new era of compounding growth

Emerging markets may be entering a more durable compounding phase, but investors should identify quality through forward-looking, bottom-up research rather than rely solely on historical metrics.

• The MSCI Emerging Markets Index returned only 3% annualized from 2010 to 2023, but rose 34% in 2025 and another 24% in the first half of 2026, with the rebound supported by broader structural forces than the dollar or commodities.
• Emerging markets are central to the AI infrastructure buildout: Taiwan and South Korea supply critical technologies, while TSMC produces more semiconductors than the entire US semiconductor industry; the article expects AI to remain a major long-term shift despite valuation and spending concerns.
• The market’s composition has moved away from energy, commodities, and financials toward technology, advanced manufacturing, and consumer businesses, while consensus still expects double-digit FY26 earnings growth excluding technology; policy credibility, positive real rates, and healthier sovereign balance sheets have also improved.
• From 1992 to 2025, the MSCI Emerging Markets Quality Index outperformed the broad index by approximately 135 basis points per year, while showing less downside in crises such as the Asian Financial Crisis, the Global Financial Crisis, and China’s 2021–2022 regulatory and property-sector crisis.
• Quality is less persistent in emerging markets: 46% of top-quartile quality companies remained there after three years and 37% after five years between 2006 and 2022, versus 55% and 47% for the MSCI ACWI; ICTSI and PriceSmart illustrate the type of durable business model the authors seek.

Takeaway: Investors should assess competitive advantages, regulation, stakeholders, capital allocation, and future profitability at the company level, because historical quality can deteriorate faster in emerging markets even when the broader asset class has attractive structural growth and valuation support.