Why we believe this EM rally has legs

How the worm has turned. Long the unloved foil to the rip-roaring returns of US growth stocks, emerging markets (EMs) have finally found their feet. In 2025, the MSCI EM index returned 34.3%, ending 16 years of comparative underperformance against the S&P 500, which could only manage a 17.9% return last year. Year to date, this positive trajectory for EMs has continued while the S&P 500 has continued mostly flat.

So where does this sudden reinvigoration of EM equities leave investors? Is it a flash in the pan or can we expect more outperformance through the remainder of 2026?

History suggests that periods of EM outperformance tend to extend over several years, rather than being short-lived anomalies. More importantly, we would point to a set of tailwinds on the horizon that could further support emerging markets and drive continued growth from here.

First of these—and perhaps the most important—is the story of the dollar. Here we’ve seen a sustained decline through 2025 and one that shows no signs of letting up at least for now. For EMs, a weakening US dollar is, on the whole, a good thing. It reduces the expense of dollar-denominated debt, while also leading to higher commodity prices and inflows of capital. (It’s something of an irony that currency manipulation may cause the benefits of a weaker dollar to be less keenly felt than they otherwise might be, but that’s a conversation for a different time.)

Two other factors play into our upbeat view on EMs: commodities and consumption. For the former, we’ve witnessed prolonged pricing pressure—and we now believe there may be headroom for an extended bull run. After years of underinvestment, the supply of many commodities is insufficient to meet rising demand. Examples include copper, silver, and gold—not to mention rare earths. Even lithium pricing has bounced back strongly. Crude oil may be bottoming, partly due to conflict in the Middle East. A boom in mining related to the build-out of data centers could be in the cards. For resource-rich EM countries, these market developments are beneficial.

On consumption, we’d highlight how much EMs have changed. While commodities remain important, rising internal consumption and demand are diversifying the investment thesis for developing countries—particularly with the growth of a nascent middle class. Consumption may still not yet be king, but it is playing a bigger role in EM economies than ever before.

So, within EM, which markets do we view as being likely to experience the strongest tailwinds? For now, our pick focuses on Taiwan, South Korea, China, and India. 

In Taiwan and South Korea we see the potential upside from continued spending on AI. Thanks to AI, fourth quarter GDP growth in Taiwan was a stunning 12.65%, and full-year 2025 growth was 8.68%.

In India, we would highlight robust GDP growth coupled with the number of recent trade deals finalized or in the works with the US, Europe and Canada. Equally, with a median age of about 30 versus 40 in China, the country enjoys favorable demographics. Also, after 18 months of weak performance, positioning in India is light, suggesting further upside should capital inflows resume.

In China our investment case has been renewed on the back of more upbeat trade news. Even at the height of the trade war with the US in 2025, the country was enjoying strong performance. Now, with state visits upcoming by the two nations’ leaders, a trade ceasefire seems the order of the day. Also in the mix: a new trade deal with Canada, which should allow China to export more electric cars to North America.

Conclusion

This is not to say there are no downside risks in our outlook for EMs. For one thing, the US could stumble and consolidate near term, when more and more questions are being asked of the hyperscalers regarding returns on their ever-rising capital spending on AI. The time-tested adage is that when the US sneezes, EMs catch a cold – and a downturn in the US would certainly put pressure on the asset class but it still might maintain its relative outperformance.

Similarly, a strengthening dollar could spell trouble for EMs. This would be the case if a new Fed under Kevin Warsh proved to be more hawkish than expected. Again, this would likely be interpreted as a negative signal for EMs and so, certainly, could spark a sell-off.

On balance, though, I am still expecting EM equity to outperform this year. Valuations are still cheap, earnings growth is decent, and monetary policy in most countries remains loose. US equity outperformed EM for more than a decade leading into 2025, which was just the first year of EM outperformance. The trend is likely to continue.