AI makes rise of emerging markets ‘more than a blip’

Mike Taylor

Managing Editor and Publisher

9 July 2026

The rise and rise of emerging market equities over the past 12 months appears to be more than a blip but it may not yet be the start of a trend, according to research and ratings house, Morningstar.

In a new analysis, Morningstar notes that after years of playing second fiddle to US equities, emerging market stocks have delivered a striking performance over the past 12 months with the MSCI Emerging Markets Index returning 38% – comfortably ahead of the S&P 500’s 16% and the MSCI World Index’s 14%.

The Morningstar analysis points to three basic pillars including the valuation of the US dollar, the earnings and valuation in terms of the emerging market equities versus US equities.

However, it suggests that a fourth pillar exists in terms of a structural shift in respect of the role of emerging markets at the heart of the global artificial intelligence value chain.

“The AI narrative has been dominated by US mega-cap software platforms such as Microsoft, Alphabet, Amazon.com, and Meta Platforms. Specialist managers argue this misses where the real bottlenecks – and the real pricing power – sit,” the analysis said.

“A cluster of semiconductor and technology companies across Taiwan, China, and South Korea has become indispensable to the AI buildout, supplying leading-edge logic chips (TSMC, Samsung), high-bandwidth memory (SK Hynix, Samsung), advanced packaging (ASE, TSMC), and data centre power systems (Delta, Foxconn).

“Positive earnings-per-share revisions of between +20% and +80% in Taiwan and South Korea are among the clearest evidence that earnings growth is broadening beyond US mega-caps, and several managers explicitly name these two markets as preferred overweights,” it said.

“For investors, the logic is pointed: Gaining AI exposure through developed-market software stocks at historically stretched valuations is not the only route. Emerging-market leadership in hardware may be the more durable entry into the same theme.”

It said that within the broad EM universe, two markets dominate the equity debate but for very different reasons.

“China, at roughly 30% of the MSCI Emerging Markets Index, remains unavoidable. The narrative has been bruising: a prolonged real estate crisis, subdued consumer confidence, and persistent geopolitical friction. Yet the structural picture is shifting. Since the property bust, China has reoriented its economy toward domestic consumption, services, and innovation across electric vehicles and AI.

“Those who spend time there describe a pace of industrial development—in EVs, robotics, and power infrastructure—that has no equivalent elsewhere. Vehicle models taking five-plus years to develop in the West are turned around in eight months in China, and the same accelerated logic is spreading into AI hardware.

“China is adding electricity generation capacity at 6 times the US rate over the next five years, a structural power advantage as AI demand scales. Yet the investment opportunity and the governance challenges are inseparable. Misalignment between controlling shareholders and minority investors is persistent, and state involvement means companies can become riskier as they grow larger. Selectivity, not broad exposure, is essential,” it said.

The Morningstar analysis pointed to the contrast with India where almost every manager spoken to held overweight convictions despite high valuations.

“Demographics, urbanization, household wealth formation, and a supportive policy environment are converging precisely as a prolonged corporate deleveraging cycle ends – historically one of the most reliable setups for continued equity outperformance. India’s maturing and broadening listed universe – spanning financials, industrials, consumer staples, and technology – gives active managers the ability to express long-term views through stock selection rather than index-level bets,” it said.

“The case for emerging-market equities rests on four reinforcing pillars: a turning dollar cycle, a recovering earnings trajectory, historically wide valuation discounts versus the US, and structural leadership in the AI hardware economy. The tariff shock of 2025 tested the thesis and ultimately reinforced it—accelerating supply chain diversification into emerging markets and contributing to the very dollar weakness that now supports the asset class. That represents a fundamentally different backdrop from the one that suppressed emerging-market returns for much of the past decade.

“For investors looking to allocate to emerging markets, implementation is critical. Active management often adds value given the inconsistent corporate disclosures, concentrated ownership structures, uneven minority shareholder protections, and high retail participation all create pricing anomalies that skilled active managers can exploit. At the same time, maintaining sufficient breadth through diversified exposure helps capture the full opportunity set while reducing the risk that any single position or theme dominates portfolio outcomes.”