Emerging Markets Strategy Memo: China & India

When looking at emerging markets today, focusing on short-term GDP prints or timing macro inflection points may not provide the most efficient investment guidance. Rather, following a structural and capital-allocation driven approach could provide better insight and alpha returns: invest where policy, demographics, and capital expenditure are aligned for multi-year compounding, even if some headline growth may look uninspiring. This philosophy explains why, when investing in China and India, exposure should be concentrated in specific sectors – e.g. Chinese technology, Indian consumer brands, and software services – that align with each country’s long-term trajectory. What follows is the framework behind these allocations, with concrete examples and supporting data.

1. Capital Flows and Structural Diversification in Emerging Markets

Following the GFC, after more than a decade of exceptional U.S. equity outperformance, global institutional portfolios have become structurally overweight the United States – largely a mechanical outcome of benchmark-driven investing and the sustained relative returns of U.S. markets. Indeed, the U.S. market has become very concentrated in a few giants (the 10 largest S&P 500 stocks now comprise roughly 41% of its market capitalization), raising concerns about diminishing marginal returns and benchmark risk. As a result, rebalancing now is increasingly pushing incremental capital toward historically underweight regions (EM and DM ex-US) in a structural fashion.

This rotation is reinforced by valuation: U.S. equities trade at ~25× P/E versus ~15× in Europe and EM, at the end of 2025, while earnings growth is not expected to be materially larger in the U.S to justify the gap.

Additionally, just 10 U.S. stocks have driven ~60% of the S&P 500’s gains, underscoring the market’s narrow leadership. A U.S. index concentration in a few mega-cap stocks, makes it harder for institutional allocators to justify extreme single-country investments, prompting gradual rebalancing to non-U.S. regions.

Another key factor to consider is governance risk, which is becoming a more critical investment factor.

In this context, the diversification and return prospects of non-U.S. markets become more attractive.

At the same time, Emerging Markets offer diversification and fundamental support that is becoming hard to ignore. In recent years, correlations among U.S. assets have generally increased (weakening home bias benefits), whereas select EM economies provide differentiated sector exposure, higher potential earnings/GDP growth, and favorable demographics. Many EM currencies remain undervalued and their real yields are comparatively high. EM corporate and sovereign balance sheets are generally in better shape than in past cycles (much of Asia improved governance, implement reforms and even built Gold reserves). The IMF notes that many major EM central banks tightened policy earlier and more aggressively than their advanced-market peers (roughly +780bp vs +400bp on average in the post-pandemic era according to the IMF), which leaves EM with a higher real rate buffer today. In parallel, global supply-chain realignment (‘China+1’ strategies) is channeling capital toward Asia’s large EM markets – particularly India, Vietnam, Taiwan, and Korea – reinforcing EM’s structural role in the global economy. Over time, supply-chain reconfiguration (e.g. firms diversifying manufacturing), including nearshoring trends, are improving earnings visibility in select EM beneficiaries.

Additional forces further reinforce this structural shift. The sheer scale of U.S. representation in global equity benchmarks means that even a “neutral” market-weight portfolio has substantial implicit U.S. exposure, making geographic diversification increasingly a necessity. Currency and yield expectations also matter: periods of anticipated U.S. dollar stabilization or weakness, coupled with attractive EM real yields, can boost returns on EM assets in U.S.-dollar terms further.

Key structural tailwinds for EM relative to the U.S.: higher expected GDP and earnings growth (IMF notes EM growth forecasts far exceed advanced economies), historically lower equity valuations, stronger yields, and supportive policy divergences. A caveat remains: emerging markets carry elevated geopolitical, regulatory and political risks, underscoring the need for active security and sector selection rather than blanket EM exposure.

2. China: Why Slower Growth Can Still Produce Strong Equity Returns

China is often treated as a single macro story, but that framing is misleading for investors. The nation is systematically reallocating capital away from household consumption, unlike the consumer-led growth models typical of Western economies, to prioritize strategic industrial, and high-technology sectors: - Advanced semiconductors – building domestic chip design and manufacturing capability.- Artificial intelligence and automation – investing in AI R&D and cutting-edge tech.- High-end manufacturing and industrial software – upgrading factories with software/robotics to improve productivity.

In practical terms, equity returns depend on cash flows and capital allocation, not on headline GDP. China’s demographics (an aging, shrinking workforce) imply structurally slower GDP growth and consumption. But that doesn’t preclude selected sectors from posting strong earnings growth if they sit at the center of national policy. From a portfolio standpoint, this implies two conclusions: (a) broad macro indicators (e.g. GDP, retail sales) are poor signals for investing in China today, and (b) sector and stock selection matter far more than country beta. In particular, the broad property and consumer sectors look less attractive for alpha in 2026 (household confidence remains weak, new-home prices have already fallen ~20% over four years and may drop further). Instead, portfolios should overweight companies directly benefiting from China’s tech and infrastructure push.

For example, offshore Chinese stock indices (e.g. Hang Seng, ADR listings) have much higher weight in “soft tech” (IT services and software) than mainland onshore indices or other Asian markets like Taiwan, Korea and Japan. This difference is shown in the chart above: Chinese offshore markets (~37% “soft tech”) outperform onshore markets in an AI-driven rally. In line with this, the Chinese Technology sector has strongly outperformed the broader MSCI China index. For example, Tencent – representative of China’s tech giants – has seen accelerating earnings and improving profit margins even as overall GDP growth slowed. In short, Chinese tech companies are compounding quickly in the background, driven by AI monetization (in advertising, cloud, enterprise software).

3. India: A Compounding Story Built on Demographics and Technology

India is a core long-term position in an EM portfolio. The thesis is demographic and structural, not cyclical. India combines:- Huge young population – Over 1.4 billion people and a median age ~29 (compared to ~40 in China).- Skilled workforce – A large, technically trained labor force (millions of engineers).- Increasing urbanization – fueling demand for modern retail and services.- Competitive federal states – Subnational governments compete for investment through reforms and incentives within the country.

Bureaucracy and infrastructure gaps still drag on growth, but reforms have gradually reduced these frictions. Even with such inefficiencies, India has averaged roughly 7% real GDP growth in recent years, and that growth is increasingly capital- and technology-intensive. Policymakers are actively encouraging infrastructure spending, manufacturing (PLI schemes), and digitalization (tax reforms, payments). The result: India’s GDP growth is translating into expanding domestic markets and corporate earnings. (Indeed, analysts at Morgan Stanley forecast that Indian corporate earnings could grow in the mid-teens annually over the next couple years, surpassing most EM peers.)

Given this backdrop, portfolio exposure in India should concentrate on sectors that monetize its demographics and tech adoption – namely consumer/retail and information technology/services. The rest of this memo explores these themes.

4. Indian Consumer and Retail: Monetizing Demographics

Rising incomes, urban migration, and formalization are transforming India’s consumption base. This is not a short-term boom but a multi-decade expansion in discretionary spending. As more Indians move to cities and shift from informal to formal shopping, branded goods and formal retail chains gain share. This pattern has played out historically in fast-growing economies: once formal retail penetration scales, leading companies compound through network effects, better working-capital efficiency, and reinforced brand trust.

India’s market is still early in this cycle. For example, India’s total retail market is on track to expand from about ₹81.6 lakh crore (~$952 b) in 2024 to roughly ₹137.1 lakh crore (~$1.6 t) by 2030. However, Deloitte data project India’s formal retail revenues to nearly double from the current 15% share to over 30% by 2030.

These trends favor companies with scale, strong execution, and wide distribution. As the economy formalizes (via GS Tax and digital payments), large listed retailers gain market share from small unorganized shops. In turn, their earnings growth can outpace GDP growth as they convert cash-based sales into transparent revenue.

From a portfolio perspective, India’s consumer and retail stocks now offer a relatively domestic-demand-led earnings stream, less correlated with global commodity or trade cycles – thus serving as diversifiers within EM portfolios.

5. Indian Software and Technology: The Quiet Semiconductor Proxy

India’s role in global tech is often misunderstood. While India does not yet mass-produce semiconductors, its IT services and engineering sectors are deeply embedded in the global semiconductor and technology value chain. Indian firms are relevant players in chip design/testing software (Tata Consultancy, Infosys, Persistent Systems), and global companies rely on India for digital engineering, AI deployment, cloud migration, and enterprise transformation. In essence, Indian IT is an indirect but powerful way to access the global semiconductor/AI cycle without owning fabs.

Importantly, Indian IT stocks are positioned to potentially outperform over the coming years, as a supportive macro backdrop aligns with structural demand shifts. History shows that when U.S./European IT spending moderates, enterprises often consolidate vendors and prioritize large-scale outsourcing – a dynamic that favors large Indian service providers. For example, during the 2008-09 GFC and again in the 2015-16 tech slowdown, India’s major IT companies gained market share as clients extended contracts and focused on efficiency.

An example of Indian IT stock is Persistent Systems, that focuses on high-value digital engineering, building bespoke cloud-native platforms, data, analytics and enterprise software solutions that are more strategic and less commoditised than traditional IT outsourcing. In Q4 FY25, the company delivered standout performance with ~20% YoY growth in both revenue and net profit, reflecting strong demand for cloud, digital and AI-led engineering services. This sustained growth profile, combined with margin resilience, positions Persistent as a higher-beta play with clear rerating potential relative to larger, more defensive IT peers.

In parallel, India is replicating dynamics seen in mature tech hubs. Global companies have thousands of Global Capability Centres (GCCs) in India that now handle core R&D, engineering, aerospace and product roles – not just back-office tasks. According to governmental sources, India’s GCC sector revenue jumped from $40.4 b in FY2019 to $64.6 b in FY2024 (~10% annual growth).

Conclusion: The EM Opportunity Is Structural, Not Tactical

China and India are fundamentally different economies, but from a portfolio-construction standpoint they share a critical feature: capital formation in both is deliberate and outcome-oriented, not simply cyclical.

China explicitly channels investment into strategic capacity – from high-tech manufacturing to infrastructure – creating enduring scale advantages.

India is channelling investment into infrastructure, formalization, and domestic demand drivers, unleashing private capital and expanding markets.

For equity investors, this matters because returns can hinge on where capital is allocated and which firms can absorb it, rather than headline GDP growth.

At the bottom-up level, companies with strong balance sheets, capable management, and alignment to these capital flows consistently emerge with greater market share, longer earnings visibility, and stronger reinvestment optionality.

In short, the EM opportunity in China and India today is about owning the right structural exposures – policy-backed technology in China, demographics-driven consumption and global-tech services in India – rather than trying to time short-term economic cycles.

AIncrementum - Andrea Bonini - January 2026