July 2026*
Emerging Markets (EM) have continued to outperform global equities, driven by resilient earnings growth in the technology sector. While higher volatility has prompted us to temper our near-term expectations for semiconductor stocks, we continue to favour strategic exposure to AI hardware. Looking ahead, we expect opportunities to broaden beyond technology as USD weakness resumes and industrial commodity demand strengthens. This quarter, we trimmed South Korea while remaining overweight, upgraded Brazil to neutral, and downgraded the UAE to underweight.
The MSCI Emerging Markets (EM) Index has outperformed the All Country World Index (ACWI) year-to-date. Much of this strength has been driven by the EM technology sector, particularly semiconductor stocks that dominate the South Korea and Taiwan equity indices. The rapid appreciation in the tech-heavy South Korea and Taiwan indices (see Chart 1) is naturally raising questions about whether AI-related valuations have become excessive and, more specifically, whether earnings growth for these historically cyclical companies can remain sustainable.
We think some investor scepticism is healthy, and we are cognisant of the higher volatility and risks associated with these markets at the current juncture. We have therefore tempered some of our bullish expectations for EM semiconductor stocks. However, our current assessment is that the trend remains favourable into 2027, and investors should continue to maintain strategic exposure. Asian export data have accelerated this year and have historically been a reliable leading indicator for earnings growth (see Chart 2). The recent improvement in global PMI data also supports maintaining pro-cyclical exposure. Furthermore, industry reports continue to point to a memory undersupply extending into next year and potentially beyond.
While our EM view remains optimistic and has largely been driven by AI hardware over the past year, we expect future returns to broaden across other sectors. In particular, EM commodity exposure could see a re-rating if AI infrastructure investment continues to support industrial commodity prices and the USD resumes last year’s downtrend. Chart 3 highlights the underperformance of EM (excluding South Korea and Taiwan) relative to US equities over the past 15 years, which has coincided with dollar strength. The USD appears to have peaked in 2025 and has traded mixed this year – USD TWI (JPMQUSD Index) is up +1.7% and EM Currency Index (vs USD, FXJPEMCS Index) is flat at +0.1%. We expect USD weakness to resume towards year-end if inflation continues to moderate (see Chart 4) and Fed rate hikes are fully priced out. Over the longer term, the USD remains expensive on a real broad effective exchange rate (REER) basis relative to its historical average (see Chart 5).
Chart 6 highlights evidence of a potential new commodity upcycle. Beyond simple trend extrapolation, we expect AI data centres and investment in new energy infrastructure to support industrial commodity demand. Citi commodity research estimates that around 20% of end-use copper consumption is now driven by data centres and the energy transition, with these sectors accounting for virtually all recent demand growth. Traditional cyclical drivers have contributed little in recent years, largely due to persistent weakness in the Chinese property market. This has also contributed to subdued mining capex, which is likely to leave industrial metals such as copper undersupplied as AI- and energy transition-related demand continues to expand. Against this backdrop, LatAm equities are beginning to present attractive value should commodity prices continue to trend higher (see Chart 7).
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Asia | ||||||
| Taiwan | – | |||||
| South Korea | ↓ | |||||
| China† | – | |||||
| 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 30 June 2026 and macro events and data releases up to 9th July 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.