Emerging Markets Hit Record Highs Amid AI Boom Despite Middle East Conflict
The MSCI Emerging Markets Index has risen 14% year-to-date, driven by strong demand for tech stocks in South Korea and Taiwan.
Records Amid Conflict: How AI Outweighed Geopolitics and Pushed Emerging Markets to All-Time Highs
Introduction
May 2026 brought a surprising twist for investors: the MSCI Emerging Markets Index hit an all-time high, surging 14% year-to-date, while the flagship US S&P 500 gained just 5.6%. This rally seems particularly paradoxical against the backdrop of an escalating military conflict in the Middle East—Iran blocked the Strait of Hormuz, oil prices soared to multi-year highs, and global markets were swept by a wave of risk aversion in March. Logic suggested that emerging markets, heavily dependent on energy imports, should have collapsed. Instead, they set new records.
What lies behind this phenomenon? The answer is both paradoxical and unsettling. The growth driver was just a handful of Asian chipmakers for artificial intelligence, which attracted global capital flows. Other emerging markets, from India to China, either did not feel this growth or even declined. The phenomenon of a "record EM market" turned out to be a story of unprecedented capital concentration in a narrow group of AI beneficiaries, accelerated by the geopolitical crisis.
Event Details and Timeline
The first two months of 2026 saw steady growth in Asian markets, fueled by demand for AI infrastructure. However, the situation changed sharply in March. US and Israeli strikes on Iran, followed by Tehran's attacks on allies in the Persian Gulf, effectively closed the Strait of Hormuz. Rising energy and freight costs triggered a sharp risk-off move in global markets. Throughout March, markets that had attracted the largest capital inflows in previous months, including South Korea, posted some of the steepest declines.
But April brought an unexpected reversal. On April 28, 2026, the MSCI Emerging Markets Asia Index closed at a record high, rising 19.7% for the month—its best performance since June 1999. South Korea's KOSPI surged 30% in a month, its best since January 1998, and Taiwan's Taiex gained 24.9%.
Over the first five months of 2026, the performance is even more striking: the KOSPI rose 57%, the Taiex 34%, and Samsung shares jumped 84%. These figures are especially surprising for South Korea, which imports about 70% of its crude oil from the Middle East.
The key turning point came when investors realized that Asian chipmakers were not only resilient to the Middle East crisis but also benefited from it. Capital seeking shelter from geopolitical risks while maintaining exposure to the AI boom flooded into TSMC, Samsung, and SK Hynix. In a single April session, foreign institutional investors bought TWD 55.71 billion worth of Taiwanese stocks.
Impact and Significance (for the World / Industry / Society)
The main takeaway from this episode is a radical change in the structure of the emerging markets index. MSCI EM is no longer a diversified instrument reflecting the economies of Brazil, Mexico, India, Indonesia, South Africa, and Asia. Today, the index functionally represents a concentrated bet on three semiconductor manufacturers.
Top 5 companies—TSMC, Samsung Electronics, SK Hynix, Hon Hai Precision Industry, and Xiaomi—collectively account for 32.4% of the MSCI EM index. TSMC alone makes up 12.5%. Three companies—TSMC, Samsung, and SK Hynix—plan combined capital expenditures of about $128 billion in 2026, comparable to the annual GDP of Hungary or Slovakia.
This means that European pension funds holding 5–10% of their portfolio in "diversified" EM are not actually getting diversification—they are getting an additional concentrated position in AI infrastructure that correlates with their investments in US stocks like Nvidia, Microsoft, Google, and Amazon.
The uneven distribution of benefits became especially evident during the crisis. The Chinese market fell nearly 9% in the first quarter, partly due to investor rotation from Chinese large caps into South Korea and Taiwan. India posted the largest decline among major markets: concerns over economic growth and protracted trade talks with the US were exacerbated by the spike in energy prices. Foreign portfolio investors have pulled INR 191,968 crore (about $23 billion) from India since the start of 2026, and analysts expect the outflow to continue as long as the AI boom persists.
Southeast Asia also diverged. Singapore rose thanks to its financial and telecom sectors, while Indonesia fell more than 20% due to its dependence on oil imports. Saudi Arabia gained 9% on state support, while the UAE declined.
Reactions from Key Players
Institutional investors redirected capital flows at unprecedented speed. In April, foreign institutional investors were net buyers in Taiwan and South Korea, while pulling money from the Indian market for the tenth consecutive month. Analysts at Geojit Investments note that "the stellar results reported by these companies provide fundamental support for FPI inflows into these markets. As long as the AI trade continues, the trend of FPI outflows from India is likely to persist."
Capital Economics takes a broader view. According to economist Elias Hilmer, the current dynamics resemble the "final stages of the dot-com bubble," when US stocks lagged while global markets kept rising. However, Hilmer believes the AI rally "still has some room to run," and any bubble in emerging markets is significantly smaller than the US dot-com bubble. Notably, if the bubble bursts, Capital Economics expects a larger decline in the US market (-12.5%) than in emerging markets (-7%).
CIO Matthews Asia Sean Taylor maintains a constructive view on structural drivers for emerging markets despite uncertainty from the Middle East conflict. He says, "The conflict has paused this to some extent, but we don't believe the story has stopped; rather, it may just need time to regain its rhythm."
Analysts at European Business Magazine highlight a critical risk: any escalation of tensions in the Taiwan Strait would immediately hit every EM fund holding TSMC. The company sits at the center of the most critical supply chain in the global tech industry, and the geopolitical risk around Taiwan remains underestimated by the market.
Forecast and Conclusions
The coming months will be determined by three key signals. First, TSMC's execution of its $52–56 billion capital expenditure plan. This will be a leading indicator of whether the AI demand thesis holds. Second, the supply-demand balance for SK Hynix's high-bandwidth memory (HBM), which drives Korean stock dynamics. Third, a reassessment of Taiwan's geopolitical risk, which could suddenly materialize in TSMC's stock price.
New investors should realize: investing in "diversified" EM funds today is not a hedge against concentration in the US tech sector but an amplification of it. The index's skewed structure means that a correction in AI capital spending would hit both US and "emerging" portfolios simultaneously.
Nevertheless, EM's relative cheapness persists: the index trades at a 44% discount to US stocks on P/E multiples. However, this "cheapness" is an average between the premium valuations of the three AI giants and the cheap but illiquid positions of other countries. This is not a single investment opportunity but two completely different risk profiles packaged into one index.
The main takeaway of 2026: the era when emerging markets were synonymous with diversification is over. The new reality is a world where AI capital spending determines the fate of an entire asset class more than wars, oil prices, and trade policy combined. Investors must learn to see through the aggregate "+14%" figure—and understand where real returns lie and where systemic risk hides.
— Editorial Team
