October 2026*
Emerging Markets (EM) are on track for a second consecutive year of outperformance, led by strong earnings growth in AI-related technology. We expect semiconductor stocks to remain a key driver in 2027, supporting continued exposure to Taiwan and South Korea. However, we look for market leadership to broaden as industrial commodity demand strengthens and USD weakness resumes, favouring Latin America and other commodity-exposed markets. This quarter, we upgraded Brazil to a small overweight.
The start of a new Fed hiking cycle, amid an ongoing energy shock, raises some concerns for global and EM equity investors. Historically, rising US rates have been a headwind for equity multiples, while a pause in the USD depreciation trend is also unhelpful for the non-tech components of the MSCI EM Index. However, while we acknowledge these risks and the potential for additional volatility, EM remains on track for a second consecutive year of outperformance relative to global equities (see Chart 1).
The key question for long-term investors is whether EM strength can persist over a multi-year period, similar to the early 2000s. During that time, key tailwinds included China’s rapid industrialisation, optimism surrounding the BRICS (Brazil, Russia, India, China, and South Africa), broad-based commodity strength, and USD weakness. There are some parallels today, including an expensive dollar (see Chart 2), which was also a feature of the early-2000s period. There are also signs of broad-based commodity strength, with the Bloomberg Commodity Index up 31% year-to-date. However, unlike the early 2000s, the EM Technology sector has been the primary driver of index returns in 2025 and 2026 as demand for AI-related hardware has surged. Taiwan and South Korea have been key beneficiaries, with a handful of companies dominating both country indices.
Our baseline view is that technology stocks will continue to lead EM in 2027, supported by AI-related demand from the global data centre buildout, agentic AI, and growth in robotics. EM semiconductor and memory-chip manufacturers remain at the forefront of this trend, with record export growth supporting earnings (see Chart 3). However, we expect EM performance to broaden in 2027. Two key catalysts would be further commodity strength, driven by the energy transition and AI-related demand for materials and power, and a resumption of the dollar depreciation trend.
On commodities, 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 because of 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. Chart 4 highlights the lack of major new discoveries over recent decades. Beyond the positive outlook for industrial metals, ongoing energy supply disruptions in the Middle East should encourage diversification towards alternative long-term suppliers, including Latin American producers such as Brazil (see Chart 5).
A key challenge to our positive commodity and EM view is the path of the dollar. Commodities tend to benefit from a weaker USD, while EM’s relative performance is closely tied to the greenback. We previously identified interest rates as the key catalyst for the currency and did not expect an extended hiking cycle this year.
| 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 September 2026 and macro events and data releases up to 7 October 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.