Emerging Market Stocks Attract Investors Amid US Downturn
Stocks of companies in emerging economies are showing record growth thanks to the AI boom and high oil prices, while the US market posts more modest results. Samsung Electronics is up 84% year-to-date.
Emerging market stocks are attracting investors amid a downturn in the US.
Introduction
2026 is delivering an unexpected surprise to global investors: while the US stock market shows sluggish dynamics, stocks of companies in emerging countries are posting record growth, attracting record capital inflows. The MSCI Emerging Markets Index has risen about 16% year-to-date, while the S&P 500 has gained only about 5%. This marks the fifth consecutive quarter that emerging markets have outperformed the US benchmark, and current April dynamics suggest a potential sixth consecutive quarter.
Even more impressive is that this growth is occurring amid serious geopolitical turmoil—war in the Middle East, closure of the Strait of Hormuz, and soaring energy prices. The rally has been driven by two main factors: surging demand for artificial intelligence infrastructure from Asian tech giants and high commodity prices enriching exporting countries. Samsung Electronics is up 84% year-to-date, symbolizing this "renaissance" of emerging markets.
Event Details and Timeline
Phenomenal Growth Amid Crisis
The first two months of 2026 saw steady gains in emerging markets, supported by structural demand for semiconductors and easing global monetary policy. However, March brought a sharp shift in sentiment: US and Israeli strikes on Iran and the subsequent escalation led to the effective closure of the Strait of Hormuz—a key artery of the global oil market. Energy prices soared to four-year highs, and global markets were hit by a wave of risk-off sentiment.
But the panic was short-lived. By the end of April, the MSCI EM Index not only recovered its losses but also hit new all-time highs, surpassing the peak reached before the Iran war began. The April rally was so powerful that the emerging markets ETF rose 9.6% in that month alone.
Asia's Tech Surge
The main driving force behind the recovery was Asian chipmakers. South Korea's KOSPI index surged 57% in 2026, and Taiwan's TAIEX rose 34%. Three companies—TSMC, Samsung Electronics, and SK Hynix—are at the center of the global AI supply chain and together account for more than a fifth of the entire MSCI EM Index.
Samsung Electronics saw its stock rise 84% year-to-date. Remarkably, this tech boom fully offset for South Korea and Taiwan the fact that they import about 70% of their crude oil from the Middle East. Positive investor sentiment around their dominance in chip manufacturing outweighed the negative effects of the energy shock.
Energy Boom in Latin America
Outside Asia, Brazil emerged as the main beneficiary of high energy prices. Having become a net oil exporter back in 2017, the country not only avoided harm from the Middle East crisis but also gained additional revenue from rising global prices. Brazil's output is expected to reach 4.76 million barrels per day by 2030, the fastest production growth on the continent.
Brazil's Bovespa index has gained 16% year-to-date, and the iShares MSCI Brazil ETF has nearly quadrupled in size over the past year to $12 billion. Brazil's materials and financial sectors are actively returning capital to investors through dividends.
Impact and Significance (for the World, Industry, Society)
Global Capital Shift: From Overheated US to Undervalued EM
The main trend of 2026 is capital rotation from the overcrowded US tech sector into emerging market assets. After years of capital concentration in the "Magnificent Seven" stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla), investors are increasingly questioning the overvaluation of these stocks.
The S&P 500 trades at a P/E multiple of 28.9, while the MSCI EM Index stands at just 18.4. But most striking is that the discount of emerging markets to the US stands at 44% when comparing forward earnings multiples—the widest gap since April 2025.
The paradox is that this discount does not indicate weakness in EM but rather reflects massive growth in corporate earnings. Analysts have raised earnings forecasts for emerging market companies by 30% in 2026, compared to just 10% for the S&P 500. In the P/E ratio calculation, earnings are in the denominator: their rapid growth leads to a lower multiple even as stock prices rise.
Structural Changes in the Global Economy
Ed Yardeni of Yardeni Research notes that while the US economy still looks outstanding, emerging countries are benefiting from the expansion of the middle class, growth in industrial production, and exports that increasingly outpace developed economies.
Additionally, there is a gradual diversification of central bank reserves toward gold and away from the dollar, while the chronic US trade deficit increases the global supply of dollars. All this puts pressure on the US currency, and for emerging markets, a weaker dollar means easier financing conditions and higher relative asset returns.
Reactions of Key Players
Record Capital Inflows
Institutional investors are actively voting with their money. In January 2026, the largest emerging markets ETF attracted over $4 billion—the best monthly result since 2015. South Korea alone received $1.6 billion in January and over $1 billion in February, while Brazil attracted nearly $1 billion in January.
The inflow growth is broad-based: Asia benefits from its involvement in AI supply chains, Latin America from the commodity factor, and Turkey and Thailand from improved financial conditions and cyclical recovery.
South Korea's "Value-Up" Policy
South Korean authorities are actively promoting corporate governance reforms, including mandatory share buybacks, to eliminate the "Korean discount"—the traditional undervaluation of local companies compared to global peers. Additionally, tax incentives are being introduced for retail investors repatriating capital from foreign stocks to the domestic market.
Strategists' Views
Bank of America strategist David Hauner calls the almost certain Fed rate cut a "volatility compressor"—a backdrop that historically favored emerging market assets. Varun Laijawalla, portfolio manager at Ninety One, highlights three factors for a bullish EM outlook: a weakening dollar, structurally better corporate earnings, and extreme valuation spreads versus the US, which historically have sent strong buy signals.
Forecast and Conclusions
Short-Term Outlook (6-12 Months)
The performance gap between emerging markets and the US could continue to widen. First, the AI boom is a long-term structural trend, not a short-term speculation. Asian chipmakers have solid fundamental positions, and demand for their products will only grow as hyperscalers (Microsoft, Amazon, Google) ramp up capital spending on AI infrastructure.
Second, the expected Fed rate cut creates a favorable environment for EM assets. A weaker dollar reduces debt servicing costs for emerging countries and increases the attractiveness of their currencies.
However, risks remain: any new escalation in the Middle East or a hawkish shift in Fed rhetoric could temporarily reverse the trend. Notably, in March at the peak of the Iran crisis, EM markets experienced a sharp correction before recovering.
Long-Term Prospects
Emerging markets are undergoing a structural transformation. This is not just a cyclical recovery but the formation of a sustainable trend: 13 of the last 14 months, EM markets have closed in positive territory, and nine consecutive weeks of gains have not been seen since 2005.
However, it is important to understand that the rally is selective. The lion's share of growth came from a few companies in Asia (Samsung, TSMC, SK Hynix) and commodity exporters (Brazil). Not all emerging markets benefit equally—success depends on involvement in "future competitive arenas": AI, semiconductor manufacturing, the energy transition, and the restructuring of global supply chains.
Investor Takeaway
For the retail investor, the current moment creates a rare dilemma. On one hand, EM stocks trade at a record discount to the US while earnings grow at a record pace—a classic buy signal. On the other hand, geopolitical risks remain high, and emerging markets are traditionally more volatile.
A sensible strategy is to gradually build positions in EM through diversified ETFs (e.g., EEM or IEMG), with a focus on regions benefiting from structural trends: Asia (chip manufacturing, AI infrastructure) and Latin America (commodity supercycle). It is important to remember that the "renaissance" of emerging markets is not a short-term spike but a long-term trend supported by fundamental factors. As strategists note, "the cheap P/E valuation of the EM index is largely due to massive upward revisions for three tech companies at the center of the AI wave." This trend could continue for years but requires patience and a tolerance for volatility.
— Editorial Team
