Skip to content
  • 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.



IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S.: Franklin Resources, Inc. and its subsidiaries offer investment management services through multiple investment advisers registered with the SEC. Franklin Distributors, LLC and Putnam Retail Management LP, members FINRA/SIPC, are Franklin Templeton broker/dealers, which provide registered representative services.  Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com.

This site is intended only for U.S. Institutional Investors and Consultants. Using it means you agree to our Terms of Use.

If you would like information on Franklin Templeton’s retail mutual funds, please visit www.franklintempleton.com.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.