Emerging markets charge into 2026 with AI power

February 20, 2026 (MLN): Emerging market equities stunned the world  in 2025, as they delivered their strongest performance in eight years and outperforming many developed markets.

The  rally may extend into 2026, driven by artificial intelligence innovation, structural shifts in China, and a potential rebound in India, according to a report “Emerging Market Equities: AI, China, and India in Focus,”  by Goldman Sachs.

The MSCI Emerging Markets Index returned 34.4% in U.S. dollar terms in 2025, surpassing most major developed equity markets despite earlier fears that tariffs would trigger a sharp slowdown.

Instead, emerging economies proved resilient. Growth held up, global financial conditions eased as the U.S. dollar weakened and interest rates declined, and lower oil prices provided relief for net energy importers.

Together, these factors created a powerful tailwind for both equities and bonds across the emerging world.

Looking ahead, the bank sees supportive macroeconomic conditions persisting.

Softer inflation across many emerging economies, helped by lower energy prices, could allow policymakers to maintain or extend monetary easing.

Meanwhile, higher prices for precious and base metals such as gold and copper may benefit resource-heavy exporters.

Corporate earnings expectations are also improving, particularly in North Asia and China, where AI-driven demand and policy support are boosting sentiment.

Emerging market equities currently trade at roughly a 40% discount to U.S. stocks on a one-year forward price-to-earnings basis, suggesting scope for valuations to narrow if momentum continues.

Artificial intelligence has emerged as a defining investment theme across emerging markets, especially in Asia’s semiconductor and hardware supply chains. China, Taiwan, and South Korea have become critical pillars of the global AI ecosystem.

South Korea was the top-performing emerging equity market in 2025, with semiconductor stocks accounting for nearly half of its gains. Taiwan also delivered strong returns, supported by exports of semiconductors, electronic components, and data servers essential to AI infrastructure.

Companies tied to the AI buildout, particularly those with full order books extending into 2026, are seen as well-positioned to sustain earnings momentum, especially as the memory-chip cycle turns upward.

China’s equity market also posted solid gains in 2025, underpinned by export resilience, innovation-led growth, and renewed activity in initial public offerings.

Despite tariff pressures, the country met its 5% growth target, aided by diversified export channels and its dominance in rare earth supply chains. China now accounts for roughly 30% of global manufacturing output, underscoring its central role in global production networks.

Policymakers, guided by the 15th Five-Year Plan, are emphasizing domestic consumption and technological self-sufficiency, particularly in semiconductors and AI.

Investment opportunities are emerging across sectors, including AI-enabled consumer platforms, lithium-ion battery manufacturing for electric vehicles and grid storage, and innovative pharmaceutical companies leveraging efficient research and development ecosystems.

Robotics is gaining traction as a longer-term theme, with China ranking as the world’s third most automated country by robot density.

Despite these structural strengths, Chinese equities continue to trade at significant valuation discounts, and foreign allocations remain below historical norms.

With property markets subdued and real returns on cash relatively low, domestic household savings may gradually rotate into equities, providing incremental support over time.

India, by contrast, lagged broader emerging markets in 2025, weighed down by high starting valuations and a cyclical slowdown in growth and earnings.

However, a rebound is expected, with profit growth projected to accelerate into the mid-teens over the next two years, outpacing the broader emerging market average.

Supportive policies across finance, industry, taxation, and trade are expected to underpin economic momentum.

A recently signed trade agreement with the United States, reducing certain reciprocal tariffs, along with ongoing negotiations with the European Union, could further strengthen export prospects.

The narrowing of India’s valuation premium relative to the broader emerging market index has improved its relative appeal, particularly after last year’s underperformance.

Domestic structural drivers remain intact. Rising incomes, favorable demographics, expanding consumer credit, and growing digital adoption continue to support consumption trends.

Small- and mid-cap companies, many of which remain under-researched, may present selective opportunities as valuations have compressed. Foreign ownership levels are near multi-decade lows, leaving room for renewed inflows if earnings rebound and currency stability improves.

Goldman Sachs emphasizes that emerging markets offer fertile ground for active investors.

After exceeding expectations in 2025, emerging markets enter 2026 with supportive macro conditions, strengthening earnings prospects, and structural innovation themes centered on AI.

With China repositioning its growth model, India poised for recovery, and Asia deeply embedded in the global AI supply chain, the asset class appears increasingly central to the global growth narrative rather than peripheral to it.

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