Emerging markets equities: have we seen the top?

A quick recap

The 2025 rally was primarily driven by multiple expansion. The MSCI EM Index edged above its historic 10-year average price-earnings (P/E) ratio. This move prompted some commentators to call EM a “sell”. Here’s why we disagree.

How to respond?  

Let’s go back to basics. Equity price returns = change in earnings per share + dividend yield + change in valuations. Using that simple formula, EM still looks well-placed for another strong year.

Consensus earnings growth and dividend yield together imply a 20.7% return for the MSCI EM Index in 2026, assuming no re-rating and no contribution from carry. That hardly looks like a market that’s peaked.

But can EM equities re-rate further? Maybe. A 10% re-rating would lift the forward P/E to 16.5x. Yes, that’s above the long-run MSCI EM average – but nosebleed territory? Hardly. And if the S&P 500 holds around 26x, a 16.5x EM multiple still represent a 36% discount to the US, wider than the long-term average discount of 32% (Note: P/Es fluctuate daily; numbers are approximate [1])

Context helps here. EM allocations remain close to a 20-year low, while the US has sucked in global capital like an AI-powered robotic Dyson. In a market where relative valuation matters more than ever, EM still screens as 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 President Trump’s recent proclamation about acquiring Greenland (since withdrawn) briefly weighed on sentiment. But the 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 defence, 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 US$600 billion on AI investment in 2026. Chipmaker TSMC has raised its capex guidance to a record US$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 moves are hard to predict, but the structural case for a weaker US 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-centre monetisation remains unproven, and investors are starting to reassess what they’re willing to pay.

In comparison, 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 monetisation of AI investment. For US hyperscalers such as Amazon and Alphabet, markets are increasingly looking for evidence that heavy data‑centre 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 derating.

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 derating 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.

Final thoughts…

So, are we at the top of the market? We don’t think so. Valuations remain historically attractive, and a weakening US dollar continues to support capital flows into EM. The three Cs – capex, carry and cheap – are still firmly in place and should continue to drive markets over the long term.

Crucially, company earnings across Asia are supported by far more than AI‑related investment. Hardware demand is broad, cloud computing remains a structural growth engine, and semiconductors continue to penetrate every corner of daily life. That diversification gives EM companies greater durability – and provides investors with a rich investment landscape to pick up opportunities with real staying power.

[1] Source: Aberdeen, Factset consensus estimates, January 2026
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Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.