Superficially, everything has been looking rosy for emerging market investors. The sector had a bumper year in 2025 and is well ahead of developed markets in 2026 as well. However, there is a catch: a significant share of the returns has come from a handful of stocks in a single sector – AI.
The main emerging market index, MSCI Emerging Markets, continues to outpace its developed peers, rising 21.8% for the year to date, around 8% ahead of the MSCI World index*. The index gained 24% in 2025, around 12% ahead of MSCI World*. In other words, emerging markets have been on a roll.
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An increasingly concentrated AI trade
While the US technology giants steal the headlines, emerging markets have their own versions: the semiconductor and memory behemoths of TSMC, Samsung and SK Hynix. These have driven the lion’s share of these stellar returns. It means the index now looks increasingly concentrated: TSMC is now 15% of the total weight, for example**.
Michael Bourke, manager of the M&G Global Emerging Markets fund, says: “Over 100% of the index performance is being driven by the ‘AI trade’ of Taiwan and Korea. Meanwhile, the equal-weighted index was up 9.7% over the same period.
“One of the conundrums facing emerging markets investors is the narrowness of this performance – the AI rally is sucking investor attention and capital from almost all other emerging markets. This divergence in performance is problematic for portfolios but also provides choices for investors seeking to diversify their AI exposure.”
Investors may not think this is a problem as long as the share prices continue to go up. After all, these are great companies, still seeing strong growth and exposed to the structural growth of AI. However, it means they have more AI exposure on top of any exposure they have in their US holdings. As the last few weeks have shown, this can be a bouncy ride. AI has become a crowded trade and there are concerns that it may have peaked.
It also means that investors aren’t getting any diversification benefit from their exposure to emerging markets. Rather than getting exposure to emerging economies or unique industries, they are simply getting another global technology company with revenues drawn from around the world.
Michael Bourke says: “Traditional broad emerging market exposure increasingly delivers a mix of policy risk, tech cyclicality and momentum factor crowding that may not align with the original diversification thesis. At the same time, pockets of genuine earnings momentum and capital discipline exist beneath the surface, demanding more granular country-level analysis and individual stock selection rather than simple index tracking.”
Looking beyond the emerging markets giants
There are plenty of other opportunities within emerging markets for investors that are willing to look deeper. For example, China and India now have a smaller share of emerging market indices, at 21% and 12% respectively, but still hold plenty of opportunities**.
Anthony Srom, manager of Fidelity Asia Pacific Opportunities, says: “China remains an area of focus, particularly within consumer-facing businesses. Restaurant group Yum China is a good example, with consistent earnings growth, margin improvement and store expansion, despite a challenging consumer environment.”
China is also making significant strides on AI. Since the launch of DeepSeek in early 2025, it has been clear that Chinese AI capabilities now rival those of the US. Its models are ‘open source’, which means they can be picked up, adapted and used by anyone rather than being under the control of a single company. This could disintermediate some of the US groups.
Chinese AI groups trade at a fraction of their US equivalents. Martin Lau, manager of the FSSA Greater China Growth fund, is also taking exposure to companies that are using AI to enhance the services they offer. “History suggests that during times of technological change it is often those firms that take advantage of new advances to improve processes, distribution models and products, rather than the builders of the underlying infrastructure, that benefit the most.
“A good example is our holding Tencent, which was another key contributor to performance in 2025. Tencent has unique advantages in the AI era: a massive user base across WeChat, games and payments; rich first-party data; and integrated advertising and content systems.”
India has been a relative weak spot within emerging markets, but it still has strong economic growth, a dynamic corporate sector and favourable demographics. Its recent weakness has allowed Anthony Srom to buy good companies at lower valuations. He gives the example of Titan, a leading branded jewellery retailer: “The company benefits from rising incomes, premiumisation and the ongoing shift from unorganised to organised retail, offering a long runway for growth.” For those looking for dedicated Indian equity exposure, they might consider the Chikara Indian Subcontinent fund or Goldman Sachs India Equity Portfolio.
Opportunities off the beaten track
Emerging markets hold other exciting growth stories. Vietnam, for example, has seen its economy expand at 8%+ as it has become a manufacturing hub for the region. The US accounts for about 30% of Vietnam’s exports***. There is strong demand from global investment in artificial intelligence and digital infrastructure.
Brazil has been another strong performer recently. It is a relatively small part of the index, at just 4%**, but the stock market has risen over 20% over the past 12 months^. It is a resources-heavy market and has been buoyed by strong commodity prices. Brazil is currently the largest country allocation – and significant overweight – in the GQG Partners Emerging Markets Equity fund at 21%^^.
Investors need to look to active managers to take exposure to these areas. They are likely to provide a more balanced exposure to emerging markets and the dynamic growth stories they hold. AI is a part of that, but it is by no means the only story.
