Emerging Markets Surge in 2026

Following a remarkable 34% return in 2025, the MSCI EM Index continued its strong performance by climbing another 7% in early 2026. Consensus forecasts project earnings growth for emerging market equities to hit approximately 17% for the year, a notable acceleration from the 12-14% growth estimated in 2025. A primary catalyst for this surge is the weakening U.S. dollar, which is trending lower amid expectations of further interest rate cuts by the Federal Reserve. This depreciation enhances returns through currency appreciation and improves financial conditions in emerging economies, making their assets more attractive. The boom in Artificial Intelligence is a significant structural driver, with the MSCI EM Index now dedicating over 30% to the technology sector, comparable to the S&P 500. South Korea and Taiwan are at the epicenter, benefiting from massive global demand for AI infrastructure, high-performance computing, and a rebound in semiconductor pricing. This rally is not uniform. A clear divergence is seen with China, which is grappling with a subdued property sector and weak domestic confidence. In contrast, countries like Mexico and nations in Southeast Asia are benefiting from the strategic relocation of global supply chains, a trend often referred to as "near-shoring". Leading the pack in early 2026, the iShares MSCI South Korea ETF (EWY) recorded a year-to-date increase of 43.8% by late February. Other strong performers included ETFs tracking Peru, Brazil, and Thailand, all posting gains of over 21%. Analysts at 22V Research attribute the momentum to a "diversification trade out of the US to other markets that are more levered to commodities, materials and the industrial AI trade.” This shift is also supported by more attractive valuations in emerging markets, which trade at a considerable discount on earnings and book-value metrics compared to their U.S. and European counterparts.