Capitalizing on Trends: Spotting Emerging Markets

The world of investing is witnessing a seismic shift, with emerging markets equities surging to their strongest annual return since 2017, defying years of underperformance.

This resurgence signals not just a fleeting rally but a robust trajectory poised to extend into 2026 and beyond, driven by powerful macroeconomic forces and transformative trends.

Investors who recognize these dynamics early can unlock exceptional opportunities for growth in regions brimming with innovation and resilience.

As global capital rotates away from overcrowded U.S. stocks, emerging markets are capturing attention with their compelling narratives of reform and renewal.

The combination of a weaker U.S. dollar and accelerating corporate earnings is creating a fertile ground for outsized returns.

This article delves into the key drivers, sectors, and strategies to help you navigate this exciting landscape effectively.

The Resurgence of Emerging Markets

For over a decade, emerging markets trailed behind developed counterparts, overshadowed by China's slowdown and U.S. tech dominance.

However, 2025 marked a dramatic turnaround, with the MSCI Emerging Markets Index outperforming major global benchmarks.

This shift is fueled by several catalysts that promise to sustain momentum.

• Double-digit year-over-year earnings growth projected in key countries.
• Central bank rate cuts amid controlled inflation levels.
• Current account surpluses strengthening local currencies.
• A global search for value beyond expensive U.S. equities.

These factors collectively underscore a structural improvement in fundamentals that investors can no longer ignore.

AI as a Central Growth Engine

Artificial intelligence is revolutionizing emerging markets, extending far beyond semiconductor hubs to encompass entire supply chains.

From advanced chip manufacturing to AI-driven cloud services, this technology is a cornerstone of future profitability.

• Semiconductors and hardware: Leaders like Taiwan's TSMC and South Korea's SK Hynix dominate critical components.
• Broader ecosystem: Electronic manufacturing and power supply units see surging demand.
• Chinese industrials excel in energy storage and electric vehicle exports.
• Internet firms embedding AI for enhanced e-commerce efficiencies.

This diversification mitigates risks and taps into hundreds of billions in data center spending globally.

The table below highlights key players in the AI supply chain:

Beyond hardware, sustainable innovations like solar-powered data centers in India are gaining traction.

Country-Specific Insights and Reforms

Each emerging market offers unique advantages, shaped by local policies and economic shifts.

China, with its 31% weighting in the MSCI EM Index, is experiencing a tech-led revival.

Policy shifts toward high-end manufacturing and de-escalated trade tensions with the U.S. are boosting confidence.

South Korea's corporate reforms have spurred over 150 firms to enhance profitability and shareholder returns.

India leverages demographic dividends and consumption policies to drive earnings growth.

• India: 5G expansion and solar data centers support digital transformation.
• Brazil: Benefits from rate cuts and insulation from global tariff wars.
• Mexico and Latin America: Gain from nearshoring trends due to U.S. proximity.

These efforts are improving earnings quality and making equities more attractive.

Macroeconomic and Trade Context

Emerging markets are forecast to grow at 4.4% real GDP in 2026, excluding China, matching 2025 levels.

China's growth is projected at 5%, supported by AI and telecom surges.

Monetary easing by EM central banks is stimulating domestic demand and investment.

Trade tensions have prompted supply chain adjustments, with EM economies showing resilience through rerouting and domestic growth initiatives.

Valuations remain appealing, with many markets trading at significant discounts to global peers.

• Korea and Brazil hover near 10-year average forward P/E ratios.
• China tech sectors have recovered but remain reasonably priced.
• This disparity offers a compelling entry point for value-oriented investors.

Broader Trends and Investment Themes

Structural changes are reshaping emerging markets, from digitalization to premium consumption patterns.

Reshoring and friendshoring trends are diversifying supply chains, favoring adaptable EM regions.

Active investors can capitalize on diversity across countries and sectors.

• Focus on companies in AI, export-driven industries, and reform beneficiaries.
• Embrace sectors like healthcare and sustainable infrastructure.
• Leverage demographic advantages in high-growth regions.

These themes underscore a long-term transformation in global economic dynamics.

Navigating Risks and Seizing Opportunities

While the outlook is promising, risks such as geopolitical tensions and AI spending cooldowns require vigilance.

Elections in Brazil and regulatory shifts in China add layers of complexity.

However, the potential rewards outweigh these challenges for informed investors.

By staying attuned to earnings growth and policy developments, one can build a resilient portfolio.

The journey into emerging markets is not without hurdles, but the path to substantial returns is clearer than ever.

Embrace this moment to diversify and grow with the world's most dynamic economies.