A Broad-Based Emerging Markets Rally Takes Shape

Key Points

• Emerging market performance has been driven by improving fundamentals across regions and sectors, with gains extending well beyond AI-linked supply chains into commodity markets and financials.
• The composition of returns reflects dynamics seen in prior EM bull phases, with deficit commodity markets, higher-beta segments, and capital markets businesses responding to stronger activity and profitability.
• With a softer dollar, supportive capital flows, and historically attractive positioning in place, the backdrop continues to favour further emerging market upside.

At the end of February 2025, we wrote an investment  letter that concluded ‘the global economic and political environment remains volatile, but, if we were asked what  an EM bull market looks like, we would say that it looks like this’. In the eleven months since then, the MSCI EM Index  has returned 42.9% in USD terms, compared with 21.0%  for MSCI World Index, and 17.9% for the S&P 500.

We have written extensively about the role of the US dollar in driving emerging economies and financial markets. In 2025, the dollar was significantly weak in the first half  of the year but then strengthened against other global currencies in the second half. That move, combined with a seemingly less volatile US policy environment, has led to questions about what 2026 might bring. Without being a formal outlook piece, we wanted to highlight a few key observations we have about the emerging market rally.

It’s not just AI and semiconductors. Undoubtedly, the AI complex was a substantial part of the strong returns in the last year, with extremely strong gains from leading semi names in Taiwan and Korea. Given the tightness of supply and demand balances in both foundry and memory chips, this has plenty of potential to continue, and we retain substantial exposure to these industries in the portfolio. Outside of that, though, MSCI Latin America returned 63.9% in USD terms in the eleven months; MSCI South Africa returned 76.6% and MSCI Eastern Europe returned 61.1%. This is a broad-based emerging market rally, not one confined to AI-linked supply chains alone.

This looks like previous EM rallies. The kinds of markets and stocks that have led previous rallies are generally performing well. Current account-deficit commodity markets (Latin America, South Africa) which have done well in previous up-cycles are again performing very strongly. Higher-beta markets within the more defensive current account surplus markets are outperforming: MSCI UAE +27.6% v MSCI Saudi Arabia +4.0%; MSCI Korea +138.7% v MSCI Taiwan +57.8% over the last eleven months in USD terms. As in past rallies, capital markets focused businesses in EM, such as exchanges, investment banks, brokerages, life insurers and asset managers, are generally seeing very strong growth in their revenues and profits from increased volumes and activity.

EM bull markets have historically lasted a long time. During the period of US dollar weakness from September 1985 to December 1988, Asian equities, which accounted for the bulk of emerging markets at the time, performed very strongly. Emerging markets also performed very strongly during the US dollar weakness from May 2002 to May 2008 and again from March 2009 to May 2013. Only a year ago, the US dollar began to decline, and emerging market equities again began to outperform their developed market counterparts. A softer dollar, relative equity valuations, capital flows, and history, all suggest that this phase of EM outperformance may still be in its earlier stages.

We don’t build our portfolio from a directional call, but we are aware of the history of the asset class, and our process leads us to prefer parts of it that both should do well and are doing well. We remain heavily overweight Latin American markets, with a preference for Brazil and Mexico, and are overweight South Africa and the UAE. We have substantial exposure to capital markets-focused stocks that are benefitting from a reorientation of savings and financial activity towards emerging markets. We are also significantly exposed to gold and semiconductors. We find much opportunity in the asset class at this time.

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RISK CONSIDERATIONS: The strategy invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations .

The views expressed are those of the portfolio manager as the date of posting, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. 

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Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested .

Investing in companies in emerging markets involves higher risk than investing in established economies or securities markets. Emerging markets may have less stable legal and political systems, which could affect the safe-keeping or value of assets .

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