Emerging market equities enter 2026 with a compelling combination of improving fundamentals, greater policy visibility and deep structural growth drivers. Despite geopolitical noise and macro uncertainty in 2025, the asset class delivered robust performance, supported by pragmatic policymaking, resilient domestic demand and valuations that continue to stand in stark contrast to stretched levels in parts of the developed world. With diversification already beginning to broaden global market leadership, emerging markets are increasingly positioned to benefit from shifts in global capital allocation.
The macro backdrop also appears increasingly constructive. The current US-dollar cycle has extended far beyond its historical average and now shows signs of reaching maturity, with rate differentials, capital flows and policy dynamics beginning to look similar to previous turning points. Historically, such conditions have tended to favour non-US assets, particularly emerging markets, where valuation starting points are far more attractive. This combination of cyclical support and improving structural foundations gives EM a stronger starting point than in previous years.
Emerging markets demonstrated notable resilience last year, with performance comfortably ahead of developed markets. A series of macro shocks failed to unsettle the asset class, largely because investors were able to look through short-term disruption and focus on stronger underlying fundamentals.
Archie Hart, Co-Portfolio Manager, Emerging Markets Equity: “2025 was a strong year for emerging markets, which outperformed their developed counterparts comfortably,” adding that despite tariff noise and regional tensions, “markets looked through near-term disruptions.” Policymaking across major emerging economies continues to be anchored by stability, transparency and long-term economic competitiveness. China’s renewed emphasis on the private sector, India’s unprecedented scale of infrastructure investment and the Middle East’s acceleration of economic diversification are reshaping growth dynamics across the developing world.
A combination of higher real rates, conservative policy stances and ongoing reform momentum continues to underpin confidence in the asset class. Regions such as the UAE and broader Middle East stand out as structural winners, supported by economic diversification and growing integration with Asia. In South America, improving policy credibility and falling rates are paving the way for renewed domestic and foreign investment.
Hart said: “Emerging markets are benefiting from a powerful combination of reform momentum, policy clarity and increasingly resilient domestic growth. From infrastructure investment in India and economic diversification in the Middle East to improving governance and capital market reform elsewhere, these structural shifts are broadening the opportunity set and strengthening the foundations for long-term growth.”
Beyond technology, reforms across multiple regions, from fiscal consolidation and financial-system strengthening to targeted industrial strategies and deepening trade links, are laying the groundwork for more durable structural growth. These shifts are expanding the opportunity set by improving macro stability, enhancing competitiveness and supporting greater long-term investment.
A significant driver of optimism for 2026 is the scale and depth of emerging markets’ involvement in the global AI value chain. While the conversation is often dominated by US mega-caps, several Asian and emerging market companies have become indispensable to AI hardware, infrastructure and power-intensive ecosystems.
Juliana Hansveden, Portfolio Manager, EM Leaders: “Select companies in Asia and other emerging markets have quietly become indispensable players in the global AI value chain,” supported by established leadership, strong moats and durable competitive advantages.
The performance of the so-called “Secret Seven” - key technology and semiconductor firms across Taiwan, China and South Korea - reflects this shift, with several matching or surpassing the achievements of their US counterparts over the past year. These companies sit at the centre of the world’s most advanced technology manufacturing cluster, benefiting from deep engineering expertise, tightly integrated supplier networks and some of the highest R&D investment levels globally. They provide the critical bottleneck components, from leading-edge logic and high-bandwidth memory to advanced packaging, switching and datacentre power systems, that determine the pace at which global AI capacity can scale.
At the same time, the traditional defensibility of software is being eroded as AI lowers barriers to entry, increasing the importance of upstream hardware ecosystems where EM companies hold structural leadership.
As global investors navigate stretched valuations in developed markets, particularly in US AI-related equities, emerging markets stand to benefit from even modest reallocation flows. The asset class remains relatively discounted while offering broader economic exposure and a more diversified earnings base.
Varun Laijawalla, Co-Portfolio Manager, Emerging Markets Equity: “It is important to note the parallels with earlier market cycles. 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.” Even a small shift in global asset allocation — such as 5% moving out of US equities — could translate into a meaningful inflow for emerging markets.”
There is historical precedent for such a shift: after the peak of the dot-com cycle, emerging markets went on to outperform developed markets materially over the subsequent decade as global leadership broadened and capital rotated toward undervalued regions. Today’s backdrop of stretched DM valuations, concentrated leadership and a potentially moderating US dollar shares several characteristics with that earlier transition.
While emerging markets remain attractively valued on a relative basis, risks such as renewed tariff uncertainty or short-term volatility linked to US market corrections could create temporary disruptions. However, the structural economic base, diverse earnings profiles and lower starting valuations give emerging markets greater potential to rebound swiftly relative to more concentrated developed markets.
Hart stated: “US policy in South America has also gained attention following recent actions in Venezuela, but this does not change the generally positive view on the broader emerging market 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 positive for South American markets.” While there has been some speculation that a stronger security focus on South America may lead to a weaker focus on other geographies, the status quo in areas such as the South China Sea or Taiwan is unlikely to change in the medium term, with deterring conflict remaining a US priority.
“Pockets tied too closely to a single narrative could face disappointment if growth assumptions cool,” but the broader asset class retains significant resilience. Emerging markets are positioned for stronger recovery potential because “valuations start from a lower level” and the underlying real economy is “far broader based than in the US,” Laijawalla cautioned.