April 2026*
Emerging Markets (EM) were broadly flat in Q1 as geopolitical tensions in the Middle East disrupted an otherwise improving macro backdrop. We continue to see supportive conditions for 2026, driven by USD weakness, ongoing AI-related investment, and resilient global growth. While a ceasefire may stabilise sentiment, risks to energy supply and inflation remain. We maintain exposure to AI hardware (South Korea, Taiwan), supply-chain realignment (Mexico, Vietnam), and China A-shares. This quarter, we reduced underweights in Brazil and Indonesia, while downgrading the Philippines, UAE, and Poland.
Q1 was expected to provide the next leg up for EM assets, as global economic data appeared to be accelerating alongside USD weakness and the ongoing AI capex buildout. We believe many of these tailwinds remain in place for the remainder of 2026; however, the Iran conflict disrupted this trend in March. The EM benchmark was roughly flat over Q1 (see Chart 1). At the time of writing, a two-week ceasefire has been announced, reinvigorating positive sentiment, with EM equities producing their strongest one-day returns since 2022 following the news.
Even if the ceasefire ultimately leads to some resolution—allowing oil and other goods to flow through the Strait of Hormuz (SoH)—the Iran conflict is still likely to leave a dent in global growth, and some shocks are already impacting markets more dependent on SoH supplies. We will need to recalibrate our growth and inflation expectations depending on how events unfold over the coming weeks. That said, past policy support and a gradual normalisation of oil flows still leave open the possibility of trend-like global growth and a continued disinflationary path. The key issue for investors is the likelihood of a sustained ceasefire, allowing SoH traffic to normalise.
In 2022, we refined our geopolitical framework to better navigate such events and support more informed investment decisions. Our inputs indicate that volatility spikes remain possible over the coming weeks and months, but incentives appear aligned for an “imperfect” negotiated settlement. Recent developments have progressed broadly in line with this framework and suggest we should not abandon our core positions. However, our framework also recognises that conflicts can lead to unexpected outcomes and adverse shocks, including recession and stagflation. While markets have rallied on news of a temporary ceasefire, key issues remain unresolved, including Iran’s control of the SoH and access to enriched uranium. Accordingly, our adjustments this quarter reflect the possibility that alternative scenarios may still materialise.
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Asia | ||||||
| China† | – | |||||
| South Korea | – | |||||
| Taiwan | – | |||||
| Malaysia | – | |||||
| Indonesia | ↑ | |||||
| Philippines | ↓ | |||||
| Thailand | – | |||||
| Vietnam | – | |||||
| India | – | |||||
| Latin America | ||||||
| Brazil | – | |||||
| Mexico | – | |||||
| Europe, Middle East and Africa | ||||||
| Turkey | – | |||||
| Poland | ↓ | |||||
| Saudi Arabia | – | |||||
| South Africa | – | |||||
| UAE | ↓ | |||||
Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous quarterly outlook. A dash indicates no change. The table shows the major Emerging Markets.
†Allocation is overweight China (via OW A-shares and N offshore stocks).
Source: CLIM
*The publication reflects asset performance up to 31st March 2026, and macro events and data releases up to 9th April 2026, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.