Emerging markets deliver best performance in 2025

Sharemarkets again dominated the headlines in 2025, but investors seeking strong returns had a much broader range of investment types from which to choose than in recent years, which were dominated largely by US technology share price surges.

The strongest returns by investment type for the 12 months to 31 December 2025 came from emerging markets, which returned an impressive 24.0%, and hedged global shares, which offered returns of 20.1%¹.

In a year marked by chaotic policy announcements from the US government – most notably the introduction of ‘Liberation Day’ tariffs on 2 April – investors looked to diversify their investments to protect the value of their money. 

The demand for gold continued to climb, reaching record heights², while the US dollar – traditionally seen as a ‘safe haven’ in times of uncertainty – weakened by about 9% against six other major currencies³ over the course of the year.

Australian shares – particularly smaller companies buoyed by gold exposure, global listed infrastructure and bonds also offered solid gains compared with their 10-year average¹ while cash returned 4.0%, almost double its 10-year benchmark of 2.1%.

Emerging markets – encompassing stocks traded in less mature markets than the US, Europe and Japan (EM) – delivered performance last year that was 2.5 times higher than their 10-year average return of 9.4%.

CFS Chief Investment Officer Jonathan Armitage says the CFS Investment team increased its allocation to these markets – which are dominated by China, Taiwan, India and South Korea – early in response to a significant gap between how western companies and those in emerging markets were being valued.

Earnings streams were being undervalued, and the launch of Chinese AI product DeepSeek sparked a “general re-think” among global investors. “The strength of China in particular but also Asian markets as a whole probably caught people off guard,” Jonathan says.

As part of its re-allocation, CFS consolidated some of the fund managers it was using and employed a mix of active analysis and systematic strategies – based on identifying patterns in market data – to identify undervalued stocks.  

Meanwhile, a trip to China late last year reinforced the view that companies in China are now developing service capabilities that move them up the value chain and increase their profitability. Combined with their ability to compete with western companies on price, this makes them a “significant threat” to western business models.

While China was the top-performing market, the AI hardware trio of Taiwan Semiconductor Manufacturing Company and South Korean companies Samsung and SK Hynix, helped generate strong returns. Gold‑linked sectors also performed well, helped by the high price of gold bullion.

Tech stocks remained influential throughout 2025, though strong earnings were no longer enough to drive the explosive share price growth of recent years.

Still, Jonathan believes it’s too early to say that the US has lost its appeal: “It’s still the world’s largest, deepest, most sophisticated capital market.”

Global share investors had reason to celebrate, with hedged global equities returning 20.1% -- well above their 10-year average return of 11.5%.

Hedged portfolios remove the influence of currency fluctuations, so a strengthening Australian dollar did not affect investment returns at the end of 2025.

Unhedged global shares slipped into negative territory in December but stayed above their 10-year average 13.0% return.

CFS took out a long‑dated insurance policy on the US market when valuations made it seem prudent, part of its dynamic asset allocation approach to risk.

Despite that, Jonathan says there is too much focus on whether an AI-driven market bubble is developing and warned against pulling money out of the US market. “We continue to find a broad breadth of opportunities in the US, both in liquid and unlisted markets,” he says.  

Closer to home, Australian shares rose 10.7%, 1.4% above their 10-year average return.

However, the real growth came from smaller Australian companies, or “small caps”, which delivered returns of about 25% for the year.

Their 27% weighting to the materials sector, particularly gold miners, provided a powerful boost as gold prices hovered at record highs.

Bonds offered strong performance over the 2025 calendar year: global bonds delivered above-average returns of 4.4% and Australian bonds 3.2% last year.

However, high government deficits in the US and Europe continue to provoke questions from investors, and Jonathan says these pressures are likely to persist.

Concerns about continuing government spending and unpredictable US government actions – resulting in some central banks reconsidering their exposure to US Treasury bonds – also affected bond markets in 2025.

Global listed infrastructure returned 10.7%, well above its 7.5% average over 10 years, benefiting from continued spending on the transition to renewable energy, and digital connectivity.

Global listed property performed slightly above its 10-year benchmark, delivering a 5.0% return.

After three strong years of investment performance, Jonathan says more modest results are likely, with fiscal concerns and inflation pressures likely to act as a ‘cap’ on returns.

In 2026, CFS remains focused on diversification, valuation discipline and dynamic risk management and we expect returns to come from a wider range of investments over the coming year.