Beyond AI: A broader opportunity in Emerging Markets

Emerging markets (EMs) have already enjoyed a strong run. Since the start of 2025, the MSCI Emerging Markets Index has gained 66.2%, ahead of European (45.3%) and Japanese equities (53.9%), and about double the return of the S&P 500 Index (32.9%) (Figure 1).

Because of this, some may question the durability of the rally, while others may ask whether they have missed the opportunity to participate. In our view, the fundamentals remain strong, but investors may need to look in different areas for the next leg of the EM rally.

EM is becoming more than an AI trade

AI has been a powerful driver of EM returns, and estimates point to earnings growth jumping more than 200% for the EM information technology sector in 2026 (Figure 2). However, beneath the headline AI trade, something broader is happening. Earnings growth has been spreading across sectors, while rising investment in defense, energy security, infrastructure, and supply chains are creating opportunities in parts of EMs that have received far less attention.

Materials and industrials earnings are both expected to rise by around 80% in 2026. Energy earnings growth is forecast to accelerate to around 40%, and consumer discretionary earnings are expected to rebound by around 20% after falling 17% in 2025. Looking ahead to 2027, estimates point to double‑digit earnings growth in nine of the 11 EM sectors.

This matters because many of today’s largest investment themes depend on the physical economy. AI needs data centers, power, and cables. Electrification needs new generation capacity. Supply chain diversification needs factories and logistics networks, while energy security and higher defense spending need new infrastructure and industrial capacity.

This is where Heavy Assets, Low Obsolescence (HALO) comes in. These are physical assets that are difficult to replicate and difficult for technology to disrupt: A copper mine, a power grid, a shipyard. These can take years and significant capital to build, and they are far less likely to be made obsolete by a new line of code. Whether investors wish exposure to power generation, grids, commodities, manufacturing, or infrastructure, many of those paths lead back to emerging markets.

Figure 3 traces these overlapping capital expenditure (capex) cycles, of which AI infrastructure is just one, through to the EM countries positioned to benefit. They fall into three broad groups: Where to drill for energy, where to dig for the metals and minerals that infrastructure and electrification demand, and where to build as manufacturing capacity is diversified and relocated. Several countries, including Brazil, Mexico, and Malaysia, appear in more than one group, a sign of how widely the benefits of this investment cycle could spread.

Looking beyond yesterday’s winners

This broadening creates a very different opportunity set for investors. Taiwan and South Korea remain home to exceptional companies, but after the surge of interest in AI and semiconductors they are hardly undiscovered. Their largest companies also now dominate the benchmark. The MSCI Emerging Markets Index has become increasingly concentrated in technology, with TSMC, Samsung Electronics, and SK Hynix alone accounting for around a third of the index.¹

As with the S&P 500 Index, this concentration is not without reason: These companies have been particularly good at capturing the economic profit from the AI capex boom, and their earnings have grown rapidly as a result. The real question is what happens when that growth slows. Given their weight within the index, the effect could be significant.

Brazil offers a useful contrast. Its investment story is driven much more by domestic economic and political factors. Elections and changing economic conditions can create periods of uncertainty and market dislocation—precisely the conditions in which a contrarian investor can potentially find opportunities. The same applies across other emerging markets. Mexico, Thailand, and parts of Central and Eastern Europe have their own economic, political, and corporate cycles.

Finding companies before the market does

In our view, investors who assume the next phase of EM performance will simply repeat the last one risk overlooking some of the most interesting opportunities. The best investment candidates are often companies that have slipped off the market’s radar: Stocks with limited institutional ownership and sell‑side coverage, where balance sheets are being repaired and earnings are stabilizing before the market takes notice.

The catalyst for change can be internal, such as cost cutting, new management, asset sales, or improved dividends and buybacks. It can also be external, such as a turn in the economic cycle or a change of government. Rather than paying up for the quality growth stocks that everyone already owns, we believe it is important to look for companies that can improve their economic returns, without overpaying for them.

A small shift could go a long way

There could also be another tailwind. After years of exceptional U.S. equity performance, global portfolios remain heavily tilted toward U.S. assets. The U.S. makes up around 64% of the MSCI All Country World Index, compared with around 10% for EMs. This means investors needn’t abandon the U.S. for EM flows to become significant. Given the relative size of the two markets, trimming U.S. equity holdings by just 1% and redirecting the proceeds to EMs would lift EM equity holdings by around 6%.² Even a relatively modest diversification away from concentrated U.S. exposure could have a disproportionate impact on the asset class.

These potential new flows would meet a supportive fundamental backdrop, with robust earnings expectations and relatively attractive valuations. EM earnings are expected to grow by close to 68% in 2026, roughly double the rate expected for U.S. and global equities. Yet EMs trade on less than 10 times forward earnings, compared with around 16‑times for global equities and 19‑times for the U.S. (Figure 4). Estimates for 2027 also point to EM earnings growth ahead of each of the major developed markets.

No longer a single trade

The rally so far has been led by the most visible beneficiaries of AI. The next phase may reward something different: A willingness to look where others aren’t. If earnings growth broadens and country cycles diverge, EMs may behave less like a single trade and more like a collection of distinct opportunities. That may make broad exposure a blunter tool and put a greater premium on selectivity: Knowing which markets are at a turning point, which companies are improving, and where that change is not yet reflected in prices.

For investors who already own the AI winners, the case for emerging markets in 2027 may rest not on adding more of the same, but on owning what the rally has so far passed by.