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European investors are on track to pour record money into emerging market exchange funds this year as they are attracted to developing countries due to stronger growth, cheaper valuations and knock-on effects of the US dollar on their three-year lows.
According to data from MorningStar Direct, European-listed EM equity ETFs, including those listed in the UK, slightly surpassed the full-year figures for 2024, covering a net inflow of 8.1 billion euros in the first seven months of the year to overhaul the 2023 record of 1.09 billion euros, according to data from MorningStar Direct.
“The overall outlook (for emerging markets) is encouraging,” said Lena Zinbalk, Associate Director of Equity Strategy at Morningstar. “Lower dollars are good for EM. That means that the domestic currencies are stronger, lower inflation and help reduce interest rates.
“We are moving from the US into a multipolar world. There is a general transition from the rise of US exceptionalism and the rise of EM,” she added. She cites stronger economic growth, “demographic benefits” that arise from younger populations, faster adoption of technology, and valuations of cheaper stock markets as factors that drive the valuation of cheaper stock markets.
The EM bond fund attracted a more muted euro 1.1 billion, which remains the highest since 2019, and has seen net outflows for three out of five years.
The European-listed EM Equity ETF holds twice the amount of assets it had at the end of 2020, while the EM bond fund signed for 5th to 24.4 billion euros during the same period.
However, available data suggests that UK investors could have been a little more silent to jump into the EM fight than their continental peers.
Mutual Fund data shows that the UK’s dominant EM fund received net $1.1 billion in the first seven months of 2025. If the flow continues at this rate for the rest of the year, this represents a solid number, but by historical standards there is nothing spectacular.
The UK investment platform also reports Muted Interest. AJ Bell said, “The increase in EM flows is not something we saw among our customers,” but Investengine paints similar pictures, with most clients continuing to choose global ETFs.
The MSCI EM index has comfortably surpassed the S&P 500 this year, but there remains a severe valuation gap between developing countries and US stocks.
The iShares MSCI Emerging Markets ETF tracks the most widely adherent stock indexes at present, currently trading at 15.7 times with last year’s earnings and book value of 2.1 times.
In comparison, the Wall Street S&P 500 index trades at a price of 28.5 and a price of 5.1.
However, EMS discounts to European companies are currently largely dissipated, with pan-European benchmark transactions earning 17.2x and 2.1xx books.
Emraly comes after years of unperformance. The benchmark stock index is below levels dating back to 2007. In contrast, the S&P 500 has quadrupled since, with the European benchmark rising nearly 40%.
The data also suggests that many European investors rely on key elements of the EM universe. China accounts for 30% of the MSCI index, ahead of Taiwan, India and South Korea.
According to Morningstar figures, Ishares Msci em ex china ucits etf has so far raised significantly more money than this sister ETF.
Also, broader morningstar data incorporating mutual funds shows that former Chinese stocks in global emerging markets have been the most popular EM category among European investors in the past year, with net inflows of 2.7 billion euros.
In contrast, Chinese equity funds, which have used some investors to handle their country’s exposure more flexibly, have seen an outflow of €600 million.
Tsymbaluk said EM Ex-China’s funding proves popular among many people investing through environmental, social and governance (ESG)-based prisms, given the issues of corporate governance that often emerge in the country.
