We leave a strong year behind, with emerging market (EM) equities having raced ahead of developed market (DM) equities in 2025.1 While expecting a repeat of such exceptional performance may be too optimistic, we believe the outlook for EM equities in 2026 remains constructive. Several themes that continue to drive earnings momentum across the asset class underpin this outlook.
Artificial intelligence (AI) supply chain
EMs are far from homogenous, and the diversity across countries and sectors creates distinct opportunity sets. AI will likely remain a key driver within the broader information technology space, and the structural growth potential of AI continues to support the investment case we foresee across key EM markets. Importantly, the opportunity set extends beyond the direct semiconductor beneficiaries in Taiwan and South Korea. We believe attractive exposure is also emerging along the AI supply chain—such as electronic manufacturing services, power supply units and printed circuit board companies.
In parallel, select China-based internet companies are increasingly embedding AI into their ecosystems, potentially leading to cost efficiencies as well as incremental growth on top of traditional e-commerce and advertising models. Leading Chinese internet names are major cloud service providers and should benefit from rising demand for AI-related workloads. They are developing competitive AI models and developing semiconductor chips, positioning themselves to participate more directly in the AI stack.
China’s industrial leadership
The global demand for power continues to rise, a trend which is accelerating amid the growing energy needs of data centers supporting the AI boom. This need has created a surge in demand for related infrastructure, including energy storage batteries and related power equipment. Chinese industrial companies are at the forefront of this trend, delivering growth in both their domestic market and, increasingly, through exports. Similarly, Chinese electric vehicle manufacturers are leveraging their technological advantages to gain international market share, a trend that appears likely to continue throughout 2026.
Policy shifts and domestic reforms
Many EM central banks have continued to ease monetary policy to support domestic demand and balance broader policy objectives, and we expect this trend to persist in 2026.
In China, the anti-involution campaign aims to curb excessive price competition and industrial overcapacity. While it is too early to gauge the success of this initiative, it may begin to shift incentives away from margin-destructive competition, particularly in sectors where policy scrutiny is rising. For well-managed companies, this could reduce the need for defensive spending to protect market share, improving earnings quality and enabling a more rational allocation of resources over time.
In India, consumption-focused policy support appears to be having impact on recent consumption trends. In 2026, the benefits of these reforms should become more evident in corporate earnings.
In Latin America, Brazil is well-positioned to benefit from a more accommodative interest-rate environment in 2026, although upcoming elections could introduce some market volatility. Mexico, meanwhile, continues to benefit from near-shoring dynamics and its strategic proximity to the United States.
Trade, tariffs and resilience
US tariffs have now largely come into place, as most countries have secured trade agreements. At the time of this writing, some EM countries, including Brazil and India, remain in active trade talks with the United States. However, these economies are relatively less reliant on exports than some peers and are therefore somewhat more insulated from direct tariff shocks should they come to pass.
EM equities have already demonstrated resilience by recovering from the initial tariff-related disruptions in 2025. And we believe that adaptability—through supply-chain adjustments, trade rerouting and domestically anchored growth drivers—should continue to support the asset class.
Conclusion
Compelling long-term themes, including leadership in AI-related supply chains, technology, digitalization, the premiumization of consumption and health care, are shaping the investment landscape for EMs in 2026. These structural growth areas, combined with supportive valuations in select EMs, underpin our constructive outlook for 2026.
Endnote
1. Source: FactSet, for the year-to-date period as of 25 December 2025. Returns for MSCI EM Index at 33.10% and MSCI World Index at 22.77%. Both returns are in US dollars. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.
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