Emerging markets: A key investment theme for 2026 

Emerging markets enter 2026 with renewed strength, supported by resilient growth, robust capital inflows, and shifting global monetary and geopolitical conditions. As developed markets face elevated volatility and slower momentum, investors are increasingly turning to emerging economies for diversification, higher yields, and exposure to long term structural growth themes. 

• How monetary policy, commodity trends, and capital flows shaped emerging market performance in 2025 - and why these forces remain central to the 2026 outlook.
• The regional stories driving returns: from China’s policy direction and semiconductor strength in Korea and Taiwan to domestic demand boosting measures in Indonesia, Thailand, and India.
• Why geopolitical shifts and currency dynamics are enhancing the appeal of emerging markets, offering diversification at a time of elevated volatility and continued uncertainty in developed markets.

Emerging market indices delivered a strong performance in 2025, supported by the rate-cut cycle that begun in developed markets in 2024 and prompted investors to seek higher yields. Output growth in many emerging economies continues to outpace that of developed markets, whether inflation trends are disinflationary – as in China – or remain relatively sticky – as in Brazil. Higher economic growth and elevated country risk typically translate into higher interest rates, and the prospect of stronger returns attracted significant capital inflows. At the same time, volatility in developed markets - driven partly by fluctuations in US tariff rates – altered risk profiles and added to concerns around slower growth.

As a result, investors in search of safe-haven assets moved towards gold, while more risk-tolerant investors favoured emerging market equities. Metals also rallied strongly, benefitting countries with significant exposure to commodities. Chile and China, for instance, gained from the appreciation of copper and aluminium respectively. The gold rally supported mining stocks, especially in South Africa, where rising gold prices bolstered the performance of domestic gold miners. By contrast, the outlook was more mixed for countries dependent on agricultural exports such as cocoa, sugar and cotton, which experienced price corrections. 

The economic uncertainty following the tariff-related “Liberation Day” declared by President Trump declared also raised questions about the traditional safe-haven status of US treasuries and the US dollar. A weaker dollar can make higher-yielding currencies more attractive, increasing the appeal of emerging markets. The markets also offer geographical diversification at a time when tariff exposure and geopolitical tensions remain significant. Emerging economies with  limited trade surpluses with the US may be particularly well placed to help hedge against geopolitical risks.

Export-driven economies – such as South Korea, Taiwan, and China – are still exposed to potential tariff changes as the US administration continues to focus on reducing its trade deficit. However, these  economies hold competitive positions in advanced manufacturing. Recent earnings from SK Hynix illustrate the continued strength of Korean semiconductors demand. Similar momentum is evident in China and Taiwan, where the semiconductors, telecommunications and AI-related sectors remain important contributors to  market performance.

In December, Chinese policymakers met at the annual Central Economic Work Conference to outline the economic agenda for 2026. Key priorities included stimulating consumption and investment to support growth of around 5%. One challenge highlighted was the imbalance between strong domestic supply and weak domestic demand. Despite a record trade surplus in 2025, internal demand remains subdued. Authorities aim to revive investment following a slowdown in the second half of the year, with an emphasis on strengthening domestic-focused activity rather than  prioritising the export-oriented manufacturing sector, which has remained resilient. China’s budget deficit target is expected to stay close to last year's record 4% of GDP, reflecting sustained public spending to support demand during the ongoing residential property downturn. Liquidity injections through lower reserve-requirement ratios and targeted interest-rate reductions are likely, although any monetary easing is expected to be incremental.

The Shanghai Composite Index rose 18% last year, its strongest annual performance since 2020. Between 2021 and 2025, technology companies represented over 90% of new listings in China, and the sector now accounts for more than a quarter of total market capitalisation. In 2025, the MSCI China gained 28%, while the CSI 300 rose 18%. Forecasts suggest further gains in 2026, supported by AI and technology‑driven momentum, even though household confidence remains muted. Chinese equities continue to offer diversification benefits, with a reasonably generally constructive  macroeconomic backdrop. Chinese sovereign yields are expected to stay range-bound, constrained by disinflationary forces on the upside and a less accommodative monetary stance on the downside.

In South Korea, a significant share of equities continues to trade below book value. Ongoing efforts to improve corporate governance could help unlock value, with Japan’s experience offering potential guide for attracting foreign investment. China’s actions to curb disorderly price competition and address inefficiencies among producers may also support market performance. 

Elsewhere in Asia, Indonesia and Thailand could see further gains in 2026, supported by policies aimed at strengthening domestic demand. Handouts to low-income households and expansionary  fiscal measures are expected to bolster consumption and underpin growth in Indonesia. India has also introduced measures to support household spending, including reforms to goods and services taxes. However, Indian equities underperformed other emerging markets in 2025. High valuations, higher-than-expected tariffs, and pressures on the software sector could delay a broader recovery.

For Saudi Arabia, despite expectations of softer oil prices, equities may benefit from the potential relaxation of  foreign-ownership limits on listed companies. This reform could generate passive inflows estimated at up to $10 billion and may help lift a market that, like India, lagged broader emerging-market performance.

Overall, emerging markets are well positioned for 2026. Volatility in developed markets is likely to remain above historical norms, and geopolitical tensions – particularly in the run-up to the US mid-term elections – are expected to persist. Structural trends, including the central role  of key Asian economies in global supply chains and the favourable outlook for selected commodities, should continue to support emerging-market performance.