It shouldn’t have been a great year for emerging markets. They have had to contend with Trump’s tariffs, geopolitical tensions and now a full-blown energy crisis. However, they’ve defied the gloom and remain top of the performance charts over the past 12 months. The question now is whether they can repeat the trick in the year ahead.
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The MSCI Emerging Market index rose 24.4% (in sterling terms) in 2025*. While the index hasn’t done as well in 2026, emerging market funds have delivered for investors, with the average emerging market fund up 15.3% since the start of the year**. Within that, there have been some real success stories. Latin America, for example, saw a significant bounce, while Asia benefited from its role in the AI boom.
The energy crisis caused by the war in Iran has undoubtedly put a spanner in the works. The MSCI Emerging Market index tumbled over 10% in March*. Many emerging market countries are having to put emergency measures in place to deal with potential fuel shortages. This crisis could dent economic growth in some hard-hit countries. India, for example, has seen its stock market slide as investors have worried that higher oil costs could hurt economic progress.
For investors, the decision is whether this represents an opportunity to buy into emerging markets’ long-term growth story at lower cost, or a reason to avoid them.
In the longer term, there’s a lot to like about emerging markets. They are at the heart of two of the world’s most compelling trends: the energy transition and AI. Emerging markets are home to many of the commodities crucial for electrification and digitisation, from rare earths to copper, and also to much of the know-how on renewable technology, such as battery storage.
They are also, potentially, far greater beneficiaries from the AI trade than developed markets. Investors continue to debate whether the $680 billion spent by the major US technology companies on AI infrastructure will translate into stronger revenues for them. However, no-one debates that it is being spent. There are some US beneficiaries, such as Nvidia, but mostly the recipients of this spending are Asian technology giants, such as chip giants TSMC or SK Hynix, or memory group Samsung, or any number of other companies in the supply chain. These companies have led the recent charge in emerging markets, with TSMC’s share price up 140% over the past 12 months***.
That said, many active managers are now backing away from the AI theme, believing – as with many US AI companies — valuations are too high. Brian Kersmanc, manager of the GQG Partners Emerging Market Equity fund exited many of the AI companies in 2025, switching to more defensive and cash-generative areas. Brazilian energy group Petroleo Brasileiro is the fund’s largest holding, at 9%^. It also holds TotalEnergies at 4.6% and BP at 3.3%^. While the fund missed out on some of the gains from the technology sector over the past year, it has served it extremely well during the recent Iran-war induced rout.
David Perrett, manager of M&G Asian, says that the “memory super-cycle” theme – whereby a shortage of memory has sent prices higher – is real, but may also be over-valued: “In terms of DRAM makers’ profitability, something genuinely exceptional is happening versus history. However, it now feels as though a lot of that strength is priced in. We were happy to be overweight earlier in 2025 when market enthusiasm was dampened by tariff and Deep Seek concerns, but with expectations now elevated, a more neutral stance feels appropriate.
However, the joy of emerging markets is that there are plenty of other opportunities elsewhere. While GQG has focused on commodities, other managers are exploring different parts of the technology complex. Rasmus Nemmoe, manager of the FSSA Global Emerging Markets Focus fund, says the group’s analysis shows that at times of technological change it is often the firms that take advantage of new advances to improve processes, distribution models and products that reap the biggest rewards. “We own several companies that are using AI in this way. Perhaps the best example is Chinese internet giant Tencent, which is sharpening its advertising targeting and boosting user engagement through application of the technology, thereby widening its already-impressive competitive moat.”
He says Tencent has kept its AI-related capital investments relatively modest in contrast to the US hyper-scalers. He adds: “We are sceptical that hyper-scalers’ returns on invested capital will sustain, whereas firms that use AI in a more targeted way should be able to leverage technological advances to improve both growth and returns. Over time, we would expect the markets to recognise and reward businesses on the right side of this distinction.”
They are also finding opportunities in the Chinese consumer sector. Rasmus points out that household savings are still high, at around RMB160 trillion (US $22 trillion) – and the government is committed to boosting consumption. The fund is invested in hotel operator H World^^. “The company has a long runway of growth as it taps into trends including increasing travel, urbanisation and upgraded consumer preferences.” The Fidelity Asia Pacific Opportunities fund also has some consumer holdings, including restaurant group Yum China Holdings, and Temu owner, PDD Holdings^.
India is an interesting area. As a major oil importer, it has been hit hard by the energy crisis. Markets were already weak in 2025 and have continued that weakness into 2026. Fund managers are finding selected opportunities there. FSSA Global Emerging Markets Focus is invested in Kotak Mahindra Bank for example^^, while M&G Asian holds HDFC Bank^.
Emerging markets have been a success story, and remain at the forefront of some major global trends. The AI trend that has led some emerging markets higher now looks stretched, but there are plenty of other areas for active managers to get their teeth into.
