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A warm welcome to the March edition of Xtrackers Spotlight!
Emerging markets delivered a decisive come-back in 2025, underpinned by improving fundamentals, attractive valuations and a renewed focus on diversification. Recent geopolitical tensions in the Middle East have reminded investors that the path forward is unlikely to be linear, with near term higher volatility and differentiated regional impacts.
In this Spotlight edition, we examine the medium-term fundamentals driving EM demand, why we believe the underlying investment case should remain compelling despite a more uncertain market environment, and how investors can implement these views with ETFs.[1]
The EM rebound has legs – and investors are taking notice
2025 looks like a turning point for emerging markets. EM equities posted their best year since 2017, outperforming developed markets for the first time since 2020[2] – driven by US dollar weakness, improving earnings and above-average growth rates.
Investors have taken note, rebuilding EM allocations at a striking pace. Year-to-date UCITS ETF inflows into EM equities have reached almost €17 bn, with both January and February exceeding every single month of 2025.[3] Yet even at roughly 10 percent of UCITS equity portfolios, EM exposure appears underrepresented given the structural role emerging markets play in global growth and diversification.[4] So, the question now is: are we just chasing past returns, or is a genuine allocation rethink in order? Four reasons speak for the latter.
Emerging markets flow momentum has accelerated strongly year-to-date
Chart 1: Monthly market NNA into EM equities and fixed income UCITS ETFs (in EUR)
Source: DWS International GmbH, data from ETFBook.com. As of 12.02.2026. Above overview shows a consolidated overview of the EM category, i.e., there is no differentiation between passive/active ETFs or ESG/non-ESG. This might lead to differences compared to other overviews where a more granular approach is taken.Past performance is not indicative of future returns.
#1: The valuation gap is far from being closed
Let’s start with the most tangible argument. EM equities still trade at a forward P/E discount of 38 percent to U.S. markets – close to historic extremes (see chart 2).[5]
That gap looks even wider when set against materially improved earnings quality across EM countries.[6] Even markets like India and Korea, which screen as expensive on headline multiples, tell a more balanced story once adjusted for sector composition.[7]
Has the re-rating only just begun?
Chart 2: EM valuation discount versus U.S. market (forward P/E)
Source: DWS International GmbH. Bloomberg. As of 05/03/2026. Period: 31.12.2024 to 05.03.2026. Comparison of forward P/E ratios (MSCI USA Index and MSCI Emerging Markets Index). Past performance, actual or simulated, is not a reliable indicator of future results.
#2: Dollar softness is creating durable tailwinds
The greenback appears to be facing structural headwinds, making a sharp rebound unlikely any time soon. The ballooning U.S. fiscal deficit, rising debt issuance and expectations of further Fed rate cuts are all keeping the greenback under pressure.[8] For EM economies, the benefits compound: dollar-denominated debt becomes easier to service, which strengthens external balances. Furthermore, dollar-priced imports become cheaper and inflation eases, giving central banks room to cut rates. Most crucially, none of this requires the dollar to fall further – the adjustment already underway may be enough to sustain the cycle.
#3: Earnings are finally catching up to the growth story
Historically, emerging markets earned a reputation for strong GDP growth that rarely translated into commensurate shareholder returns.[9] That is changing. AI infrastructure, energy transition and supply-chain diversification are driving real earnings growth across emerging markets – led by Asia's semiconductor and manufacturing hubs. Underpinned by structural themes rather than just commodity or dollar cycles, we see reason to believe that EM earnings growth is becoming more sustainable.[10]
#4: Demand for diversification should remain strong
Rising U.S. dominance in global benchmarks has left many portfolios concentrated in a single market and with the accompanying US dollar currency risk.[11] Trade tensions, policy uncertainty and elevated index concentration are prompting investors to rethink their positioning – and the strong flow momentum toward EM (see chart 1) suggests they are already acting on it. EM equities offer a distinctively lower correlation to global equities (chart 3) , enriched with an exposure to higher growth rates – a diversification benefit that should continue to attract capital flows.
EM countries can offer genuine diversification alongside compelling growth
Chart 3: 5Y daily correlation versus MSCI ACWI and 5Y Sustainable Growth Rate
The sustainable growth rate (SGR) is the maximum rate of growth that a company can sustain without having to finance growth with additional equity or debt. SGR = ROE x (1- Payout Ratio). Source: DWS International GmbH, MSCI, as of December 2025.
The key themes driving the EM re-rating
The macro tailwinds outlined above apply broadly across emerging markets. But beyond the broad macro picture, regional and individual country stories within EM can add conviction of their own. Looking beneath the surface, four distinct clusters stand out currently – each providing a solid hypothesis for attracting capital flows.
1 Taiwan and Korea
sit at the heart of the global AI and technology supply chain, with Taiwan controlling roughly 90 percent of AI server manufacturing capacity and Korea leading in advanced memory.[12]
2 Latin America
on the other hand, remains an attractive value play – with commodity exposure tied to the energy transition and infrastructure spending providing additional cyclical upside[13]
3 India
is the poster child of a broader domestic demand story within EM – a market powered by favourable demographics and rising domestic consumption, with relatively low dependence on global trade cycles.[14]
4 China
for its part, functions less as a traditional EM beta play and more as a standalone diversifier (also see chart 3). With exports accounting for only 20 percent of GDP and a deliberate policy shift toward high-tech manufacturing and domestic consumption, the market is far less tied to global trade than commonly assumed.[15]
What about the short-term market context?
The recent escalation of the Iran conflict has brought heightened volatility and uncertainty to markets. While emerging‑market equities may face near‑term headwinds from a stronger U.S. dollar and elevated oil prices, we believe the structural investment case for EM remains intact – and periods of market stress could create selective buying opportunities.
Our CIO’s current base case assumes a contained conflict with limited spillover to other regions or the broader global economy.[16]However, should the situation turn into a prolonged confrontation with oil prices above USD 100 for longer, the implications for equities in general – and EM in particular – could turn more negative.[1]
In Summary
Risks to the view:
Systemic shocks—such as recessionary pressures or geopolitical dislocations—trigger broad risk-off sentiment, with equities typically bearing the brunt. Defensive sectors may underperform if inflation reaccelerates or central banks turn more hawkish. Market leadership can rotate quickly, especially if investor sentiment shifts toward cyclical or speculative growth.
Key Risks:
An investment in an Xtrackers ETF may not be suitable for all investors. Xtrackers UCITS ETFs are not capital protected, therefore investors should be prepared and able to sustain losses up to the total loss of the capital invested.
Investors should be aware that DWS Investments UK Limited, any of its parents or any of its or its parents subsidiaries or affiliates may from time to time own interests in the funds which may represent a significant amount or proportion of the overall investor holdings in the Fund. Investors should consider what possible impact such holdings, or any disposal thereof, may have on them.
Substantial fluctuations of the value of the investment are possible even over short periods of time.
Investments in Xtrackers UCITS ETFs involve numerous risks including but not limited to general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the Xtrackers UCITS ETFs, possible delays in repayment, market fluctuations, counterparty risk, foreign exchange rate risks, interest rate risks, inflationary risks, liquidity risks, loss of income and principal invested and legal and regulatory risks.
Movements in exchange rates can impact the value of your investment. If the currency of your country of residence is different from the currency in which the underlying investments of the fund are made, the value of your investment may increase or decrease subject to movements in exchange rates.
Shares in Xtrackers UCITS ETFs which are purchased on the secondary market cannot usually be sold directly back to the fund. Investors must purchase and redeem such shares on the secondary market with the assistance of an intermediary (e.g. a market maker or a stock broker) and may incur fees for doing so (as further described in the prospectus). In addition, investors may pay more than the current net asset value of a share in a Xtrackers UCITS ETF when buying shares on the secondary market and may receive less than the current net asset value when selling such shares on the secondary market.
The value of an investment in Xtrackers ETFs may go down as well as up. Past performance does not predict future returns.
For further information regarding risk factors, please refer to the risk factors section of the relevant prospectus and the Key Investor Information Document.