Why Canadian portfolios need emerging markets now
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A powerful mix of innovation, undervaluation, and underallocation is creating one of the most compelling setups in years for investors seeking diversification and long-term opportunity
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FOR MORE than a decade, emerging markets (EM) have lived under the shadow of two persistent narratives. The first is that innovation comes from the developed world and only diffuses outward. The second is that EM returns are hostage to currency swings, global rate cycles, and episodic political disruption. Yet the underlying composition of the asset class has changed significantly.
A closer look at the fundamental drivers of today’s emerging markets shows a landscape that has shifted from commodity sensitivity to world-class businesses. Earnings growth is accelerating across regions. Valuations remain deeply discounted. Capital flows are only beginning to recover from a historic period of underallocation.
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“Emerging markets are underestimated, they are undervalued, and they are significantly underallocated. When those three conditions come together, that is when you want to lean in”
Andrew Ness, Franklin Templeton Global Investments
The case for emerging markets cannot be reduced to a single catalyst. It sits at the intersection of innovation leadership, attractive pricing, and a structural supply of future potential inflows. Inflation had already eased across many EM economies while central banks in the United States, Canada, and Europe were still deciding when to act. Currencies were steadier. Rate cuts were already underway. A softer dollar only amplified the advantages. But the real story is not what happened in the rearview mirror. It is what these conditions reveal about where the next leg of global growth may be forming.
It is in this context that Andrew Ness, managing director of global emerging markets at Franklin Templeton Global Investments, believes investors should pause and reconsider their assumptions. “Emerging markets are underestimated, they are undervalued, and they are significantly underallocated,” he says. “When those three conditions come together, that is when you want to lean in.”
The most overlooked story in emerging markets investing is the rise of innovation as a structural driver. Asia now accounts for more than half of global patent grants. The semiconductor supply chain is dominated by emerging market firms such as Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, and SK Hynix, companies that sit at the centre of the technologies powering artificial intelligence, cloud computing, and advanced electronics.
“More innovation is coming out of emerging markets than any other region in the world,” Ness says. “These businesses are not just competitive. They are shaping global industries.”
The electric vehicle and clean energy sectors show a similar pattern. China and Korea lead the world in EV battery production. Companies like BYD continue to scale rapidly across Europe, moving from niche competitors to mainstream manufacturers with global footprints.
Digital infrastructure tells another part of the story. India’s biometric identification system, which covers roughly 95 percent of the population, has enabled seamless access to bank accounts, payments, and brokerage platforms. This single development has transformed the country’s savings and investment behaviour. “India is a prime example of how financial penetration can reshape a market,” Ness explains. “When nearly everyone can open a bank or brokerage account instantly, it changes how capital forms and how companies grow.”
Other regions across Latin America and Asia are moving along similar paths. Companies like Cognizant, though listed in the United States, derive much of their talent and operational strength from India. These types of firms can fall outside traditional EM indices, yet they represent the global, services-oriented businesses driven by highly skilled emerging market workers.
This transition matters because it broadens the base of EM earnings beyond commodities. Profitability is now driven by domestic consumption and world-class global businesses. The result is a stronger, more resilient foundation that behaves differently than the emerging markets of 10 or 15 years ago.
The valuation gap that has room to close
Even after a strong year, EM equities remain deeply discounted relative to developed markets, in particular the US. On a price-to-earnings basis, emerging markets trade at roughly a 38 to 39 percent discount to the S&P 500. The 10-year average sits closer to 29 percent. Based on 2026 earnings expectations, the gap widens to more than 40 percent.
“Earnings expectations for emerging markets exceed those of the United States, Japan, and Europe,” Ness says. “Fundamentally speaking, the current discount does not make sense. Therefore, we believe there is room for that gap to narrow.”
Currency dynamics also look more favourable than they have in years. The US dollar has been range-bound, which can reduce the currency impact on EM returns. Meanwhile, emerging markets have been cutting interest rates more slowly than developed economies, a trend that supports currency stability and preserves real yield advantages.
Christian Galipeau, senior market strategist at Franklin Templeton Institute, published research that highlights past cycles when global rate cuts resumed after a pause and EM equities generated one-year average returns between 24 and 30 percent. The common elements were broad policy easing, increased inflows, and a dollar that did not materially appreciate. Two of those conditions are already in place.1
The valuation argument is straightforward. Emerging markets investing offers higher earnings growth at a lower price. If the earnings picture holds and policy signals remain supportive, the discount has room to compress.
A structural allocation gap that could drive the next leg The final force in Ness’s framework is underallocation, and it may prove the most powerful. Fifteen years ago, global investors held roughly 13.5 percent of their equity exposure in EM. Today, that figure is near 5 percent. The 10-year average sits around 6.7 percent. A return to even that midpoint would require hundreds of billions of dollars in inflows.
“We are not seeing North American investors return in size yet,” Ness notes. “The flows you see today are being driven mostly by domestic EM investors, especially in India. But for North American investors and global investors more broadly, the starting point is extremely low. Canadian investors are just off 10-year lows in their allocation to emerging markets. Underallocation is real. That creates optionality because the portfolio shifts have not happened.”
“The universe is more than three thousand stocks. You need scale and depth of research to uncover all the opportunities in emerging markets”
Ness warns that many investors underestimate how narrow their EM exposure actually is when they rely on global mandates. Global equity portfolios might hold EM megacaps like TSMC. What might be missing are the e-commerce platforms selling to young, educated emerging consumers in large, populous countries like China, India, Brazil, and Indonesia; the renewable energy supply chain leaders across China helping to decarbonize the world; or opportunities in the Middle East, where wealthy economies are meeting structural reforms. Dedicated EM allocations from managers with a deep research team can capture this breadth. Global mandates generally do not.
One data point illustrates the disconnect. As Ness notes, many of the companies in the portfolio of the Templeton Emerging Markets Fund are not found among the top holdings of the largest EM competitors.
“The universe is more than three thousand stocks,” Ness says. “You need scale and depth of research to uncover all the opportunities in emerging markets.2
In 2026, the alignment of key forces is clear. Earnings expectations outpace those of developed markets. Valuations remain discounted. Currency conditions are stable. Policy environments across EM continue to support growth. Capital flows are slowly stabilizing.3
The backdrop is changing in ways that are hard to ignore. We believe the stars are starting to align and emerging markets are in compelling position to deliver multi-year periods of strong returns.”
The question for investors is whether they recognize how different today’s EM looks from the version shaped by the past decade. Growth drivers are broader. Earnings are supported by the rise of domestic consumption and industries with global relevance. Policy cycles are converging in favourable ways. And the world’s largest asset allocators remain significantly underweight.
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Innovation is redefining the EM opportunity set
Published January 26, 2026
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Andrew Ness, Franklin Templeton Global Investments
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Sources: Analysis by Franklin Templeton Institute, Factset. As of 11/12/2025. MSCI indexes used for international countries, in USD. US represented by the S&P 500. There is no assurance that any estimate, forecast, or projection will be realized.
AVERAGE EXPECTED EARNINGS GROWTH FOR 2026–2027
%
25%
20%
15%
10%
5%
0%
Emerging markets
India
S&P 500
Europe
Japan
33%
32%
29%
24%
21%
2-year cumulative growth rate
35%
30%
40%
Sources: Analysis by FT Institute, GRL. FactSet, MSCI, S&P Dow Indices, FactSet Market Aggregates.
S&P 500 NTM price-to-earnings discount/premium vs. countries (as of 9/30/2025)
%
NTM P/E discount/premium
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
India
Canada
Japan
Germany
Europe
INTERNATIONAL EQUITY VALUATIONS VS. U.S.
Discount vs. the US
Premium vs. the US
Emerging markets
UK
China
Note: US is represented by S&P 500 and all other countries are represented by their respective MSCI country index. Sorted as per current data.
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. 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 information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI 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. Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction. Issued by Franklin Templeton Investments Corp., 200 King Street West, Suite 1400 Toronto, ON, M5H3T4, Fax: (416) 364-1163, (800) 387-0830, www.franklintempleton.ca.
https://www.franklintempleton.ca/en-ca/articles/2025/institute/how-global-equities-and-fixed-income-performed-with-a-resumption-of-fed-easing
MSCI Emerging Markets IMI Indexes - https://www.msci.com/documents/10199/255599/msci-emerging-markets-imi-usd-net-since-2007.pdf
Franklin Templeton Institute, 2026 Capital Markets Outlook (Chris Galipeau, Senior Market Strategist), December 2025. Data as of November 30, 2025.
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