CONTRIBUTORS
Dina Ting, CFA
Senior Vice President, Head of Index Investments,
Franklin Templeton Investment Solutions
- Emerging markets (EMs) remained ahead of US equities through mid-September, extending the asset class’s comeback even as oil prices, rising US bond yields and the dollar tested risk appetite.
- The headline EM index masks wide differences across countries, sectors and companies, driven by earnings, valuations, policy and exposure to structural themes such as artificial intelligence (AI) infrastructure.
- For investors seeking broad EM exposure, a systematic multi-factor approach can use quality, value, momentum and low volatility to diversify sources of return and help manage risk.
EMs entered 2026 with momentum, and that momentum has largely held. Year-to-date through mid-September, the MSCI Emerging Markets Index returned nearly 22%, maintaining a meaningful lead over US equities.1 The resilience is notable given the more demanding current backdrop: Oil moved above US$100 per barrel in September, US Treasury yields rose sharply and the dollar firmed as the US Federal Reserve (Fed) returned to rate hikes. Even against those headwinds, EM equities remained near recent highs.
How to Own EM
Broad index performance can obscure striking differences beneath the surface. Technology-heavy North Asian markets have benefited from AI infrastructure demand and the semiconductor cycle, while commodity exposure, domestic policy, trade sensitivity and reform agendas have produced very different outcomes elsewhere. The same is true at the sector and company level. In our view, that dispersion argues for maintaining a broad opportunity set while being deliberate about how securities are selected and weighted.
Exhibit 1: Emerging Markets Have Regained Ground Against US Equities
MSCI Emerging Markets Index vs. S&P 500 Index
September 2023-September 2026
Source: Bloomberg, as of September 18, 2026. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging markets countries, covering approximately 85% of the free-float-adjusted market capitalization in each country. 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 results.
A Stronger Test of the EM Thesis
In September 2026, the US dollar strengthened alongside higher US bond yields after renewed inflation concerns and the Fed’s 25-basis point rate increase. Brent crude also traded above US$100 per barrel, creating a more difficult backdrop for oil-importing economies and rate-sensitive assets.
That resilience is more meaningful if it reflects more than a cyclical bounce. In our view, the opportunity set is also being reshaped by longer-term forces: Emerging markets occupy critical positions in AI hardware, advanced manufacturing and commodity supply chains, while governance reforms and more credible policy frameworks are improving the path from economic growth to shareholder returns in some markets. Progress is uneven, but the backdrop is different from the one that defined much of the prior decade.
Importantly, the case for broad EM exposure does not depend on every country moving together. In fact, a market with more differentiated outcomes can create a richer environment for systematic selection. A rules-based approach can start with the broad EM universe and tilt toward companies that score favorably on fundamental and risk characteristics rather than allowing market capitalization alone to determine portfolio weights.
One Asset Class, Very Different Markets
South Korea and Taiwan. Both have remained among the clearest examples of how structural themes can drive very different outcomes within EMs. They have benefited from the global buildout of AI infrastructure and semiconductor demand, while Seoul has also seen continued policy focus on corporate governance and shareholder returns. At the same time, the concentration of technology exposure in both markets creates distinct risks that a broad EM allocation must absorb and balance.
India and China. India illustrates a different part of the opportunity set. Its long-term domestic growth case remains intact, but the near-term backdrop has become more challenging as high oil prices and tighter global financial conditions have weighed on sentiment. China, meanwhile, is better framed around valuation, policy support and the potential for a recovery in domestic confidence than around broad market leadership.
Brazil adds another set of drivers: commodity exposure, a domestic easing cycle and the prospect of greater policy clarity around the October election. Taken together, these examples show why EM should not be viewed as a single macro trade. Different markets respond differently to the same global forces, creating both diversification potential and portfolio-construction challenges.
The dispersion across emerging markets provides opportunity for investors to make individual country calls, but it also opens the door for broad EM investors to participate in the asset class’s long-term growth potential through factor-based security selection that doesn’t rely solely on market capitalization to determine which companies and risks dominate the portfolio.
A disciplined, rules-based multi-factor approach can instead evaluate companies across the broad EM universe using a combination of quality, value, momentum and low volatility. The objective is to build exposure around characteristics that can provide a more balanced and resilient way to participate across changing market environments.
Exhibit 2: A Multi-Factor Approach Has Historically Delivered a Different Risk Profile
MSCI Emerging Markets Index vs. LibertyQ Emerging Markets Index
August 31, 2026
Source: Bloomberg. Five-year period from August 31, 2021 through August 31, 2026. Returns are based on net total return indexes. Annualized volatility calculated from daily returns; maximum drawdown reflects the largest peak-to-trough decline during the period. The LibertyQ Emerging Markets Index is based on the MSCI Emerging Markets Index, its parent index, which includes large- and mid-cap stocks across EM countries. The LibertyQ EM Index is designed to reflect the performance of a Franklin Templeton strategy that seeks exposure to four factors: Quality, Value, Momentum and Low Volatility. 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 results.
The risk data also reinforce why implementation matters. Over the five years ended August 31, 2026, the LibertyQ EM Index generated an annualized return broadly comparable with the MSCI EM Index, but with materially lower annualized volatility and a shallower maximum drawdown. That does not imply smoother performance in every period, but it illustrates how a multi-factor construction can change the risk profile of broad EM exposure rather than simply changing which market is expected to lead next.
EndNotes
- Source: Bloomberg, as of September 21, 2026.