EM Equity Outlook 2026: From Rebound to Rotation - Institutional Analysis

The convergence of multiple cyclical and structural factors positions emerging markets equities favorably for 2026. The weakening U.S. dollar represents a significant tailwind for EM assets, historically demonstrating positive correlation with EM equity outperformance. A weaker dollar reduces debt servicing burdens for EM countries with dollar-denominated obligations while simultaneously making EM assets more attractive to foreign investors seeking currency appreciation gains [1][4]. The Hartford Funds 2026 outlook emphasizes that increased liquidity in the financial system benefits EM assets, which tend to be more sensitive to global capital flows [5].

Capital Group’s analysis indicates that 2025 delivered EM their strongest annual return since 2017, driven primarily by dollar weakness and global rotation into non-U.S. stocks. For 2026, accelerating earnings growth and AI-driven demand create promising catalysts that could extend this momentum beyond a mere cyclical rebound [2]. JPMorgan’s outlook reinforces this view, forecasting EM GDP to meaningfully outpace developed markets, underpinned by stronger demographics and rising domestic consumption across major emerging economies [4].

The critical theme distinguishing the 2026 outlook from previous years is the broadening of EM leadership beyond concentrated technology exposure. Durable growth drivers are emerging across multiple sectors that collectively provide a more diversified foundation for EM equity performance [1][2].

represents the most significant growth catalyst, with global AI buildout creating sustained demand for semiconductors, data centers, and related hardware produced across EM economies. State Street Global Advisors specifically highlights AI-driven productivity growth as bullish for EM countries including India, Saudi Arabia, and the UAE, where governments are actively driving AI development and infrastructure investment [1]. Charles Schwab’s analysis emphasizes that “EM companies are increasingly AI companies,” with Chinese AI enablers and adopters driving optimism alongside global AI buildout creating demand for EM hardware and infrastructure providers [3].

demands are escalating due to the massive capital expenditure requirements for AI data centers and broader electrification trends. This creates opportunities for EM companies positioned in power generation, transmission, and related infrastructure sectors.

increases across emerging economies provide another structural growth driver, with governments allocating greater resources to military modernization and security infrastructure.

sectors benefit from rising domestic healthcare consumption, medical technology adoption, and reshoring trends that favor select EM economies positioned in global supply chains [1][6].

The competitive landscape for EM equities is evolving with notable shifts in regional leadership that create differentiated opportunities [2][6].

stands to benefit from “friendshoring” trends, record foreign direct investment in semiconductors and rare earths, and diversified economic drivers. Global X’s 2026 outlook identifies the region as positioned for structural growth with multi-sector exposure spanning technology, manufacturing, and consumer markets [6].

, particularly Brazil, presents compelling opportunities driven by “outsized monetary policy stimulus and key political shifts.” JPMorgan and Capital Group highlight Brazil’s potential, with historical average rallies of approximately 95% during rate-cutting cycles. Rate cuts expected in Q1 2026 could provide significant momentum for Brazilian equities [2][6].

receive specific attention as beneficiaries of government-driven AI initiatives and economic diversification strategies. These countries are actively positioning themselves as AI infrastructure hubs while developing domestic consumption capacity [1][3].

remains a complex consideration, with JPMorgan noting potential “green shoots emerging in the private sector after a multi-year slowdown.” The focus on innovation and advanced manufacturing over property supports sectors including AI, electric vehicles, and biotechnology, though property sector concerns persist [4].

emerges as a potential wildcard opportunity, with credible policy reforms, easing FX controls, and foreign direct investment inflows. Possible MSCI EM re-inclusion and attractive valuation at 8.5x forward earnings could attract investor attention [6].

A pivotal insight from the institutional analysis is the view that EM’s 2025-2026 recovery may represent a structural re-rating rather than merely a cyclical rebound. William Blair’s thesis explicitly states that EM’s comeback “appears to be evolving into a more structural re-rating—one where investors can access both global secular themes and a more diversified foundation for long-term potential” [1]. This distinction carries significant implications for investment strategy and time horizon expectations.

The Hartford Funds analysis supports this interpretation, noting that after more than a decade of underperformance relative to developed markets, EM equities outpaced DM equities in 2025 for the first time in years, potentially signaling a meaningful turning point in relative performance dynamics [5]. If this structural shift is sustained, it could fundamentally alter asset allocation considerations for global portfolios.

JPMorgan highlights “ongoing improvements in corporate governance” as a structural positive that distinguishes the current EM environment from historical periods. Combined with “healthier fiscal balance sheets across major EM economies,” this suggests improved fundamentals supporting potentially higher valuations [4]. These qualitative improvements address long-standing concerns among EM investors regarding governance standards and fiscal discipline, potentially justifying premium valuations relative to historical norms.

Charles Schwab’s analysis notes that estimates of future earnings for the MSCI Emerging Markets Index have jumped in conjunction with AI-driven optimism, keeping equity valuations attractive relative to the S&P 500 while remaining “no longer deeply discounted relative to history” [3]. This evolution requires more selective positioning rather than broad EM exposure.

The institutional consensus suggests a constructive but selective approach to EM investing. While valuations remain attractive relative to developed markets, they no longer represent the deep discounts that characterized previous investment cycles. This context implies that successful EM investing in 2026 will require greater emphasis on country and sector selection rather than broad beta exposure [3][5].

The diversification benefits from broadening sector and country leadership provide opportunities for EM exposure beyond traditional concentration in China, Taiwan, and Korea. The weaker dollar thesis suggests potential additional returns from unhedged EM equity exposure, as currency appreciation could augment local market performance.

Several catalysts present attractive opportunity windows for EM investors in 2026:

represents the most significant near-term catalyst, as sustained dollar weakness could accelerate capital flows into EM assets. Historical patterns suggest strong correlation between dollar depreciation and EM equity outperformance [1][4][5].

creates sustained demand for EM technology and infrastructure providers positioned in semiconductor manufacturing, data center development, and related hardware production. The secular nature of AI investment suggests this demand could persist beyond near-term cycles [1][3].

in key EM economies, particularly Brazil where rate cuts are expected in Q1 2026, could provide additional support. Historical analysis shows Brazilian equities historically rally significantly during rate-cutting cycles [2][6].

in countries including Argentina, India, and Indonesia could trigger valuation reratings as investors reward credible policy implementations. Argentina’s potential MSCI re-inclusion represents a specific catalyst that could attract dedicated EM capital [6].

emerges as the most significant risk to the constructive outlook. State Street explicitly notes that “AI spending carries risk” and an unexpected deceleration among hyperscalers could disrupt the EM market rally that has been partially AI-driven [1]. If AI-driven earnings targets prove optimistic, valuations could compress significantly.

presents another concern, as de-anchored long-end rates could create volatility affecting EM capital flows. The new U.S. administration’s policy direction introduces uncertainty around potential protectionist measures that could impact trade-dependent EM economies [3][4].

including trade tensions, sanctions, and regional conflicts could disrupt the positive momentum. China’s continued property sector weakness remains a concern with potential contagion effects for regional economies [4].

exists if AI-driven earnings expectations prove unfounded. The narrowing discount relative to historical norms means EM equities have less valuation cushion if sentiment shifts negatively [3].

The near-term window appears particularly opportune given the convergence of dollar weakness, anticipated EM rate cuts, and positive sentiment momentum. However, this window could narrow quickly if U.S. policy developments or AI spending announcements introduce volatility. The medium-term outlook depends heavily on AI infrastructure buildout execution and reform implementation in key EM economies.

Emerging markets equities enter 2026 positioned for potential structural advancement rather than merely cyclical recovery. The combination of dollar weakness, improving fundamentals, and broadening leadership across sectors and countries creates a more durable foundation for EM performance than has existed in recent years [1][2][4].

Major institutional investors express broadly constructive views on EM equities, with consensus emphasizing the transition from rebound to rotation. This terminology signifies belief in fundamental rather than purely cyclical improvement. However, selectivity is advised given valuation evolution and concentration risks around AI themes [1][2][3][4].

The EM opportunity set has genuinely broadened beyond historical technology concentration, with durable growth drivers emerging across AI infrastructure, power, defense, healthcare, and advanced manufacturing. Regional diversification opportunities exist across Southeast Asia, Latin America, India, and the Middle East, though country and sector selection will be critical to capturing value [1][2][6].

Key indicators warranting ongoing monitoring include the U.S. Dollar Index trajectory, MSCI EM relative performance versus developed markets, EM GDP growth differentials, AI capital expenditure announcements, EM local interest rate trends, and foreign direct investment flows to key EM destinations [1][4][5].

The analysis suggests EM equities may be in the early stages of a structural re-rating with opportunities for selective exposure to countries and sectors positioned to benefit from AI-driven growth, supply chain diversification, and rising domestic consumption in emerging economies [1][2][4][6].