By
Alexis Freyeisen, CFA
02 June 2026
Key takeaways
- The artificial intelligence (AI) boom has been reshaping emerging markets (EM), allowing Asian tech leaders to exert growing influence.
- However, geopolitics are complicating the outlook for EM by amplifying country dispersion – but not derailing the investment case for the asset class.
- Despite the currently volatile environment, investors should continue to look beyond the immediate noise and focus on the fundamental forces shaping markets.
EM equities are navigating a material supply-side shock following the escalation of the conflict in the Middle East. Despite this, they have continued their march higher in 2026, meaningfully outpacing their US counterparts, thanks to the growing influence of Asian tech leaders.
This would have been hard to imagine just a few years ago. But we have seen a great degree of evolution in EM in the past few years. Looking at a simple index composition, we would first note that the MSCI Emerging Markets Index today looks similar to the S&P 500® Index with outsized tech exposure, although it trades at a 43% discount on a next-12-months price-to-earnings (P/E) ratio basis, as of the end of April 2026 (Figure 1). Second, China's role is diminishing, with the country’s weighting in the MSCI Emerging Markets Index having fallen from its peak of 43.2% in October 2020 to 23.0% as of April 30, 2026, putting it behind Taiwan and not much ahead of South Korea.
Figure 1: The changing face of EM – sector and country weights (%)
Source: FactSet, as of April 30, 2026.
Often framed through politics and currencies, EM investing may not carry the level of volatility people once thought. North Asian countries are seeing growing representation, with leading companies across not only AI but high value-add manufacturing industries like batteries and the broader energy transition. The AI-related investment boom is spilling over to North Asian economies through technology exports. With US hyperscalers expected to invest $750 billion in AI infrastructure in 2026, approximately 60-70% of this spending flows to Asian manufacturers of servers, chips, and networking equipment, according to Goldman Sachs . Taiwan and South Korea emerge as the primary beneficiaries, but other economies like Malaysia, Singapore, Thailand, and Vietnam play supporting roles in assembly, testing, and packaging. This boom has strengthened current account balances in tech exporters. In contrast, the situation is more complicated for countries that are energy importers without the tech tailwinds, such as Indonesia, India, and the Philippines (Figure 2).
Figure 2: Current account balance as % of GDP
Sources: Nomura Asset Management, Macrobond. Data and estimates as of April 30, 2026.
Currencies, politics, and energy tend to have short-term impacts on prices but rarely determine long-term returns, which are driven more by company fundamentals. And fundamentals have been improving across EM, with earnings outpacing those of US companies for the past two years. Figure 3 shows earnings growth rebased to 100 on January 1, 2023, right after the launch of ChatGPT on November 30, 2022, a defining moment for global markets.
Figure 3: EM earnings are outpacing the US (next 12 months earnings per share)
Source: FactSet. Data as of May 22, 2026.
This earnings growth acceleration has been supported by the AI tech wave, which runs through South Korea and Taiwan, in particular. China, albeit on its own, has also seen a resurgence in innovation accompanied by various initial public offerings. From an AI deployment standpoint, we are seeing progress in China with companies like Alibaba and Tencent driving AI use forward and finding ways to grow their businesses. India, so far absent from the AI rally, could stand out more prominently in the future as it transitions to adopting AI given its tech-savvy population, digital initiative, and relatively open data policies. In the meantime, any recovery in earnings has been delayed, in our view, while valuations remain too elevated.
Conclusion
We remain generally constructive on the outlook for EM, on the back of improved fundamentals, thematic tailwinds, and attractive valuations. Risks remain, however, whether from geopolitics or politics, reinforcing the need for durable franchises that can compound through the policy noise. At present, we see many opportunities in South Korea, Taiwan, and across Latin America, but we remain cautious on India due to valuations and China where competitiveness remains high across industries and regulatory risks are too high. At the sector level, we prefer an overweight to the technology and industrials sectors, via select South Korean holding companies and memory semiconductor manufacturers. Despite their strong performance, we remain optimistic about their growth prospects given that, in our view, AI has fundamentally changed the role of memory in compute infrastructure from commodity to strategic asset, while multiples remain very low, not reflecting this new reality.
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