With emerging market valuations near 30-year lows and AI demand running through Asia, experts say Canadian pensions have no excuse to stay underweight
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Canadian institutional investors have historically treated emerging market (EM) equities as an afterthought. The US mega-cap trade dominated portfolios, and the perceived risks of EM, such as currency swings, political instability and headline noise have all kept allocators on the sidelines.
But EM portfolio managers and strategists say a convergence of structural shifts is forcing a reassessment, particularly as earnings growth in EM is outpacing developed markets, valuations sit near multi-decade lows relative to the US, and the global AI supply chain runs through Taipei and Seoul and not Silicon Valley.
The question facing pension funds, however, is no longer whether EM deserves a place in the portfolio, but why the allocation remains so thin.
“What I think is still in the mind of many investors is that emerging markets are always behind the curve and are running behind developed markets in technology and in many developments, which is not really true anymore,” said Claus Born, head of client portfolio management, EMEA and LatAm at Frankfurt-based Templeton Global Investments, part of Franklin Templeton, adding that EMs currently represent approximately 12 per cent of the MSCI ACWI, while many Canadian pension plans remain well below that level.
What’s holding EM allocators back
He attributes the shortfall to three factors. First, a prolonged stretch of EM underperformance relative to US and developed-market equities - lasting roughly 10 to 15 years and only broken in 2025 - caused many investors to stop paying attention to the asset class altogether. Because pension funds have long decision-making cycles, a decade of disappointing returns is enough to push EM off the agenda entirely, Born suggests.
He also pointed to a persistent perception that EM carries far more risk than developed markets. However, the volatility gap at the asset-class level is modest, he said, noting it’s roughly 10 to 15 per cent higher than developed markets, because the risks across individual EM countries are not fully correlated. The perception problem stems from investors conflating the volatility of single markets like Brazil with the asset class.
Lastly, thin media coverage of EM countries means the headlines that do break through tend to skew negative, reinforcing an unfavourable image as an investment destination.
The macro case builds for EM equities
But Alessia Berardi, head of global macroeconomics and emerging markets strategy at Amundi Investment Institute in the United Kingdom, grounds the macro case for EM equities in two pillars, highlighting the growth premium that still favours emerging markets over developed economies. Central banks have also acted early enough on inflation to maintain credibility without tipping into overly restrictive territory.
As a result, upward revisions to EM growth in the first part of the year have kept pace with those in the US, preserving the differential, she said.
“We are in a situation where we do have a growth premium that’s still in favor of emerging markets,” she said.
The AI supply chain has reshaped how EM fits into a global equity allocation. Taiwan and Korea — home to TSMC, Samsung and SK Hynix — now sit at the centre of the semiconductor value chain that powers every large language model and data centre build-out on the planet.
While Berardi acknowledged that EM indices carry the same top-heaviness problem as developed markets and that weight sits in semiconductors, Arup Datta, managing director and head of global quantitative equity at Mackenzie Investments, based in Boston, argues EM is a tech place, just like the US is.
“If you are positive on AI, how can you not be positive on EM AI, especially with TSMC being the semiconductor company of the world?” he said.
While Datta isn’t calling for an all-in bet, he argues the combination of historically cheap valuations and structural alignment with the AI cycle makes a compelling case for investors to build out their EM allocation rather than continue to neglect it.
Concentration risk and what lies beyond it
Still, Berardi sees meaningful diversification beyond the semiconductor trade, noting that commodities, like energy, soft commodities and metals offer exposure to structural global trends that have nothing to do with AI.
“Emerging markets remain exposed to interesting structural trends beyond the technology because commodities are now quite important diversifiers,” she said.
Andrew Aucoin, senior vice-president and portfolio manager at Toronto-based Foyston, Gordon & Payne, strikes a more cautious note on the dominance of a handful of semiconductor names within the EM index.
He argues the concentration risk is real, and the cyclical history of these businesses gives him pause. Margins are running far above anything these companies have produced in previous cycles, yet the market appears to be pricing that profitability as permanent.
“There seems to be a view in the market today that these companies that are currently generating gross margins at levels far more than any level they’ve ever produced in the past are now sustainable into the future,” he said. “We’d just be highly skeptical of that from a fundamental perspective.”
His concern is that investors are assessing these businesses at the peak of the cycle without accounting for a track record that includes swings from high profitability to operating losses. Foyston’s approach is to evaluate companies over full cycles, and from that vantage point, the current moment calls for caution rather than conviction, Aucoin noted.
The long road to benchmark
While Born pushes back on the idea that 2026 marks an inflection point for the asset class, he acknowledged technology’s growing weight in EM isn’t new because it’s been building for 15 years. Meanwhile, the semiconductor industries in Taiwan and South Korea notably represent multi-decade developments rather than sudden breakthroughs.
The AI trade has amplified what was already there, pulling investor attention toward companies that were generating strong returns long before large language models entered the conversation, Born noted.
For Born, the result is that pension funds overwhelmingly treat EM as a single asset-class allocation rather than a collection of country plays. Even then, most remain well short of where they should be, as the MSCI ACWI benchmark weighting for EM has sat between 10 and 12 per cent over the past decade.
He sees the shift away from single-country mandates as a defining feature of how institutions now approach EM, underscoring the era of standalone China allocations has faded, and while a handful of pension funds have looked at India on its own, the appetite for country-specific bets stops there.
“Many investors are still far away from this,” said Born, adding today, institutional weightings sit below seven per cent. He estimates it could take five to 10 years to reach something closer to index level, if it happens at all.
“In the last two years, we have seen an uptick in demand from institutional investors globally and in Canada as well to become more active in emerging markets equities,” he added.
