A once-in-a-generation opportunity

Q How was 2025 for emerging market equities?

2025 was a strong year for emerging markets, which outperformed their developed counterparts comfortably. Various macro shocks did not derail the asset class; despite noise around tariffs and regional conflicts, markets looked through near-term disruptions. While policy uncertainty in the US remains elevated, policy visibility within emerging markets is much greater. China confirmed the importance of the private sector in its economy. India is pouring more concrete than it has ever done before. Most of the Middle East is focused on economic progress, while Asia retains its strong economic competitiveness, particularly in the realm of technology.

Economic, fiscal and monetary policies in emerging markets are generally both pragmatic and conservative, with their direction well understood and accepted by markets. In the context of tariffs, while trade remains essential, a significant proportion of revenues in the emerging market equity universe is generated within emerging economies themselves, with only a modest share linked to exports, and a relatively small proportion derived from the US. This, together with deeply discounted valuations, is among the key reasons why emerging markets performed so well.

Another key reason was excitement around the opportunity and potential for AI to transform our world. While US mega caps continue to dominate the conversation, there are select companies in Asia and other emerging markets that have quietly become indispensable players in the global AI value chain. With established leadership positions, robust capabilities, and strong moats, these firms may offer durable, underappreciated opportunities for long-term investors. Emerging markets have their own tech champions, which we have dubbed the ‘Secret Seven’ – Delta Electronics, Anji Microelectronics, Accon Technology, Samsung Electronics, TSMC, SK Hynix and ASE Technology. They have outperformed the US Magnificent Seven this year, with TSMC keeping pace with NVIDIA, given its role as the sole producer of NVIDIA’s highest-end chips.¹

Q What should investors expect across emerging markets in 2026?

The current setup resembles the early 2000s. One of the dates that stock market historians will remember is 10 March 2000. That was the peak of the Nasdaq and the dot-com bubble. It was entirely plausible to believe two contradictory things at the same time: the internet was going to be transformational over the next 25 years and change our lives, and that markets looked expensive, with extreme valuations. The internet was indeed incredible, yet the Nasdaq fell 77% over the next two years.

If we fast-forward to today, we can say AI is going to be incredible for the next 25 years, but that does not necessarily make this a good time to buy developed market AI-related securities that already look overstretched. If the AI story fails to deliver the short-term benefits that are currently priced in, that will present an opportunity for asset classes with greater breadth and diversification. In 2025, we saw the start of the diversification trend as markets started to broaden, and we expect this trend to continue, especially given the extreme US valuations. The US is especially relevant because it accounts for two thirds of the MSCI All Country World Index; therefore, if confidence falters, allocators will look elsewhere. If 5% of allocations come out of the US market, that would represent a 30% inflow into emerging markets. Even a small reallocation from the US can therefore have a meaningful impact on EM.

Q What are the key elements of support within emerging markets?

Emerging markets benefit from several structural strengths. Many emerging market central banks maintain higher real interest rates and more conservative policy settings than their developed market counterparts, supporting currencies, anchoring inflation expectations, and reinforcing financial stability.

Geographically, the UAE and broader Middle East remain structural winners as they diversify beyond oil and deepen links with India. South America, led by Brazil, could see robust domestic and foreign inflows as rates fall and pro-market reforms take root. Both regions are still under-owned.

In terms of AI, the emerging markets space is well stocked, led by the ‘Secret Seven’. Anji Microelectronics has become a leading player in the Chinese semiconductor space, while companies like Delta Electronics and other switch and network vendors have benefitted from the upgrade cycle linked to AI workloads in data centres and network supply chains. The broader tech ecosystem is covered by Samsung and SK Hynix, which illustrates the broadening out from GPU computing to memory and storage. Meanwhile, battery leaders such as CATL benefit from scale, sustained R&D, and fast-growing grid storage, providing a non-US route to energy transition optionality that intersects with AI power needs. TSMC is a core enabler of global AI, with outsized capex, rising margins, and a long record of high returns. Exposure to foundry leaders and memory suppliers captures AI compute demand without relying on a single US platform¹.

From a portfolio perspective, emerging markets may also act as an effective diversifier. While they would sell off in the short run if US equities correct, lower starting valuations and reduced dependence on AI-driven earnings should allow them to recover more quickly. In a scenario where crowded US positions unwind or short-term AI expectations are revised lower, this valuation cushion becomes an important source of relative resilience.

Q What are the biggest risks facing emerging markets in 2026?

If changes to the tariff regime or rhetoric reappear in 2026, this could lead to uncertainty for tariff-exposed supply chains. This could create volatility for supply chains that rely heavily on US-bound exports. However, risks can be mitigated by focusing on businesses with strong local or regional demand, or where exports to the US have already declined. While emerging markets overall are discounted, pockets tied too closely to a single narrative could face disappointment if growth assumptions cool.

US policy in South America has also gained significant attention after recent actions in Venezuela, but this does not change our generally positive view on the broader asset class. Arguably if the US erects a security umbrella over the Western Hemisphere and acts to install or maintain western and market friendly regimes, this could be a positive for the in South American markets. There has been some speculation that a stronger security focus on South America may lead to a weaker focus on other geographies, but we do not believe the status quo around such areas as the South China Sea or Taiwan is likely to change in the medium term, with deterring a conflict remaining a US priority.

Aside from geopolitics, another risk that investors remain cognisant of is the impact of a broader equity market correction, given their elevated levels. If the US markets falter, emerging markets will also decline in the short term, along with developed markets. But we would expect a much better bounce in emerging markets than in developed markets for two reasons: valuations start from a lower level in emerging markets, and if one looks at the real economy, returns are far broader based than in the US. For instance, the UAE’s property market, South Korea’s ‘Value up’ programme to improve corporate governance and long-term structural change in India, helping reshape its capital market, are all potential drivers of non-AI-related returns in the future. If we again head back 25 years to when markets were flat on their back in 2000, we then saw 10 years of incredibly strong relative performance in emerging markets.

¹ No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.

This is not a buy, sell or hold recommendation for any particular security.