Emerging market equities: Have we seen the top?

Last year was a knockout for EM equities, with the MSCI EM Index jumping 34% in US dollar terms – beating the MSCI World Index for the first time since 2017 – driven primarily by multiple expansion that pushed the index above its historic 10-year average price-earnings (P/E) ratio, which compares a company's – or index's – share price to its earnings, prompting some commentators to call EM a “sell.”^1,2

Here’s why we disagree.

How to respond

Let’s go back to the basics.

Change in earnings per share + Dividend yield + Change in valuations = Equity price returns

Using that simple formula, we believe EM still looks well-placed for another strong year.

Looking at the building blocks of equity index performance – consensus earnings growth and dividend income – the MSCI EM Index screens as having a solid fundamental underpinning for 2026, even without assuming any changes in valuations or additional carry. This analysis relates to index-level components rather than predicting investment returns, and indexes themselves are not directly investable. That hardly looks like a market that’s peaked.

Can emerging market equities re-rate further?

Maybe. If EM equities were to trade on somewhat higher valuation multiples, the MSCI EM Index’s forward P/E would move modestly above its long-run average. Even then, EMs would continue to trade at a meaningful valuation discount to the US equity market, where multiples remain significantly higher.^3,4

Context helps here. EM allocations remain close to a 20-year low, while the US has sucked in global capital like an artificial intelligence (AI)-powered robotic Dyson. In a market where relative valuation matters more than ever, EM still screens as being genuinely attractive.

Where do we go from here?

In our view, the three Cs – CapEx, carry, and cheap – will remain the key drivers of EM in 2026.

Of course, recent short-term noise has crept in. President Trump’s recent proclamation about Greenland briefly weighed on sentiment. But the three Cs are structural, not cyclical. They have the potential to shape EM performance over the long term. Here’s why.

CapEx

Fiscal deficits are widening across major economies. The US, Japan, the EU, and China are all entering a large-scale investment cycle driven by defense, energy security, supply chain resilience, and long-overdue infrastructure upgrades. That means more spending on real assets, which should boost economies. Crucially, EM economies have the industrial depth, technical capability and resource base needed to meet this wave of demand.

AI-related CapEx is also accelerating. Bloomberg expects Meta, Google, Amazon, and Microsoft to spend around $600 billion on AI investment in 2026. Chipmaker TSMC has raised its CapEx guidance to a record $56 billion. The earnings outlook for hardware manufacturers remains strong. Korean memory-chip suppliers are using their market leadership to push through price rises. Consensus expects 49% earnings growth for the broader technology hardware sub-sector. Risks are increasing, but investment momentum is building and continues to drive earnings higher.

Carry

Short‑term currency movements are hard to predict, but the structural case for a weaker dollar remains intact. US policy settings, stronger EM balance sheets, and rising domestic investment are encouraging capital to flow out of the US and into EM markets. That dynamic is already showing up in firmer EM and Asian currencies this year.

Cheap

Even after the 2025 rally, the MSCI EM Index still trades at around a 42% discount to the S&P 500 – noticeably wider than the long-term average discount of 32%. At the same time, markets have begun to question the eye-watering valuations of US tech stocks. Data center monetization remains unproven, and investors are starting to reassess what they’re willing to pay.

In comparison, we believe EM breadth looks increasingly compelling. Domestic consumption is picking up and monetary policy is easing. Meanwhile, the winners are broadening beyond AI to include memory chips, industrials, and India’s domestic demand story. In other words, the opportunity set is vast – and still comes at a discount.

What are the risks?

There are always risks when it comes to EM. In 2026, the most talked about is the monetization of AI investment. For US hyperscalers, such as Amazon and Alphabet, markets are increasingly looking for evidence that heavy data center spending can translate into profits. Without that evidence, valuations could come under pressure.

However, valuations for AI‑related EM opportunities are far less stretched. Korean and Taiwanese hardware makers have benefited from US demand, but AI is only one of the drivers among several for Asian firms. That broader earnings base gives them more resilience if US tech undergoes a de-rating.

Asia demand drivers

In Taiwan, US‑related AI demand typically accounts for 20–30% of revenue. In Korea, it’s around 10–20% on a market-cap weighted basis. That’s doesn’t mean these companies will be immune to a de-rating of the US hyperscalers, but it does mean their earnings aren’t solely tied to AI.

The drivers of hardware demand extend well beyond AI. Cloud computing remains a powerful growth engine, underpinning how we work every day – from accessing Microsoft Office files through the data running through our mobile phone apps. And semiconductors are now embedded in almost everything, from toothbrushes to toasters.

That breadth of end‑market demand provides Asian hardware makers with a much more diversified earnings base.

Endnotes

¹ MSCI Emerging Markets Index℠ is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
² MSCI World Index℠ is an unmanaged index considered representative of stocks of developed countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
³ S&P 500® Index is an unmanaged index considered representative of the US stock market.
⁴ Aberdeen Investments, FactSet consensus estimates, January 2026.

Important information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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