Here are five reasons why investors should consider incorporating EM and Asia Pacific equities into portfolios today, along with the potential risks to be considered.
Emerging Markets (EM) and Asia Pacific ex-Japan equities rose by over 30% in 2025. The outperformance was driven by artificial intelligence (AI)-led demand dominated by North Asia, and China’s cost-effective innovation, supported by a softer US dollar and lower rates. In 2026, emerging markets and Asia Pacific equities continue to offer robust opportunities, for both hedging and growth, with valuations remaining attractive on a price-to-earnings basis compared to western markets. This momentum is reinforced by North Asia’s central role in the global AI build-out, accelerating earnings growth for the asset class, rising capital returns, and a unique opportunity of innovation and income in China – while offering true diversification beyond China too. Here are five reasons why investors should consider incorporating EM and Asia Pacific equities into portfolios today, along with the potential risks to be considered.
1. Riding the tailwinds of a weaker dollar and an inflationary boom
Recent US dollar weakness has provided a meaningful tailwind for EM equities. Historically, EM equities have rallied when the dollar softens, and the significant decline in the DXY (US dollar index) Index through 2025 has coincided with strong EM performance. For instance, during the mid-1980s to mid-1990s dollar decline, EM equities returned around 500% (Exhibit 1). In the early 2000s, another phase of US dollar weakness saw EM equities rise by about 275%. Most recently, from 2022 to early 2026, EM equities have returned roughly 50% during the current period of dollar softness. With US growth now lagging the rest of the world and the dollar still 10% overvalued, per our 2026 Long-term Capital Market Assumptions (LTCMA) report, we see further room for depreciation – providing a sustained tailwind for EM assets. This backdrop is especially favourable as many EM central banks retain ample room to stimulate growth after years of restrictive policy.
Simultaneously, most of the world outside China is experiencing an inflationary boom, with strong growth and manageable inflation supporting cyclical sectors and assets with pricing power. Emerging markets act as the world’s factory and store of value, led by commodities and precious metals dominance, and their role supplying goods, resources, and increasingly, technology leaves them particularly well positioned to benefit. Policy rates remain accommodative, inflation is trending lower, and funding costs are contained – conditions that typically extend the boom phase. While this cycle will eventually transition, current evidence suggests we are not yet approaching the bust phase, with no signs of overheating or sharply rising funding costs, suggesting a conducive environment for emerging markets to thrive.
2. Emerging markets and the Asia Pacific region are the engine of the AI build-out
As of February 2026, the technology sector represents around 33% of the MSCI EM Index1 making it the largest sector. EM and Asia Pacific tech includes global leaders in semiconductors design & fabrication, hardware, IT services, and cloud technology. While the leading IT services companies are well known, EM and Asia Pacific tech companies are also underwriting the AI revolution, with AI- related demand providing a strong tailwind for Asian manufacturers.
Asia’s dominance is clear: in 1990, the US and Europe led semiconductor production, but today, Asia produces 70% of the world’s semiconductors. The US still designs most logic chips, but manufacturing is concentrated in Taiwan and Korea, where tech stocks continue to benefit from increased AI adoption and higher CAPEX, despite ongoing debate about return on investment (ROI). Taiwan produces ~90% of the world’s advanced semiconductors, and South Korea, specifically Samsung and SK Hynix have ~62% market share in global dynamic random access memory (DRAM).2, 3 To put things into context, building 1 gigawatt (GW) of data centres requires USD 30 billion - USD 50 billion in capex, with 40% of this value captured by Asian firms4 such as TSMC (logic chips), SK Hynix (memory), ASE Technology (packaging/testing) and Wiwynn (servers).
China’s AI capex cycle is estimated to be 12–18 months behind the US, but spending is set to accelerate into 2026. DeepSeek has catalysed domestic AI investment, creating a broad universe of software and AI capex beneficiaries, independent of the developed world’s cycle. Government support and a deep engineering talent pool are accelerating progress. China is advancing in lagging-edge chips and assembly, focusing on self-reliance, with hyperscalers such as Alibaba, Tencent and Baidu leading a new wave of AI capex. Alibaba is embedding generative AI across its platforms, Baidu’s ERNIE Bot serves over 200 million users, and Tencent’s AI reach spans 1.3 billion users.
EM and Asia Pacific investors can gain access to this growing theme through exposure to companies with the same dominance and growth exposure as US tech companies, but at roughly a ~27% discount on a price-to-earnings (P/E) basis as of Jan 2026 valuation discount and in line with its five-year average.*
* The P/E ratio refers to the market cap weighted P/E ratio. Data as of end January 2026. Asia Pacific Tech Hardware refers to 19 stocks in tech hardware basket. The US Tech Hardware includes 20 stocks in the SPX index in hardware and semiconductor industry.
3. Earnings-led upside with attractive valuations and improving capital return
EM and Asia Pacific equities now trade at compelling forward price-to-earnings discounts to developed markets, even as price-to-book ratios look full in some segments. This valuation gap is especially attractive given robust earnings per share (EPS) growth in technology, and in select materials and financials stocks, providing the potential for earnings to broaden through 2026. We pencil in ~17% EPS growth for our coverage in 2026 with room for further upside.
Building on this resilience, EM and Asia Pacific markets are embracing shareholder reform. While the US and UK led the buyback trend in the 2010s, which in turn supported EPS growth, EM and Asia Pacific equities EPS growth lagged due to net equity dilution. In 2025, however, there was a significant increase in buyback announcements in Korea and Japan signaling a decisive shift towards investor-friendly policies. Annual buybacks as a percentage of market cap have risen from under 0.20% in 2021 to 1.6% in Korea and 2.3% in China, compared to 2.5% in the US, underpinning total shareholder returns.
Following Japan’s lead, Korea is advancing reforms to boost shareholder returns through its corporate Value-Up programme, targeting improved capital efficiency and governance. Improvements are evident in dividend payouts, share buybacks, and board independence, with companies setting clear return-on-equity (ROE) and return-on- invested-capital (ROIC) targets. For instance, companies that have announced targets expect ROEs to move from an average of 6.8% in 2024 to 11.4% in 2027. Chinese firms are also increasing buybacks amid strong cash reserves and low rates (see the next section for more details). These reforms are setting the stage for long-term value creation across the region.
4. China’s twin opportunity: Innovation and income in a deflationary environment
China offers a striking dichotomy: world-class technology and manufacturing on one side, but persistent weak consumption and a property market overhang on the other. As real estate slows, policymakers are doubling down on advanced manufacturing and technology to drive the next wave of growth.
China’s tech ecosystem is thriving (see previous section on technology), with breakthroughs such as DeepSeek’s AI, CATL’s rapid electric vehicle chargers, and Xiaomi’s pivot to electric vehicles – all underscored by a boom in patent approvals. China’s leadership in AI and automation stands out, even amid ongoing political and trade headwinds.
Capital discipline is taking centre stage. Despite state bank recapitalisations and a record HKD 280 billion5 raised via initial public offerings in Hong Kong through 2025, Chinese firms are prioritising shareholder returns through record dividends and buybacks, signalling a shift to sustainable value creation. This shift addresses past concerns about dilution and signals a maturing market focused on sustainable value creation. Our LTCMAs pencil in an increase in total factor productivity for the country, with levels now on a par with the US.
On the macro front, clouded by cautious consumer sentiment and external risks, recent fiscal and monetary stimulus is laying the groundwork for recovery. While deflationary pressures lift export competitiveness, indicators are consistent with China seemingly moving from a deflationary bust China appears to be moving from a deflationary bust toward a deflationary boom – where falling prices coexist with rising output and innovation. This shift creates a unique twin opportunity: high-growth AI and industrial leaders that benefit from price competitiveness and share gains, and higher-yielding insurers and shareholder-friendly platforms for income.
Despite ongoing structural challenges, signs of improving demand-supply dynamics, easing deflation, and selective growth areas suggest China’s economy will “muddle through,” offering both innovation-driven upside and resilient income streams.
5. Diversification: Emerging markets and Asia are more than just China
While China often dominates the EM and Asia narrative, the universe is far broader and richer, offering investors a mosaic of differentiated growth drivers, including AI “picks and shovels,” financial deepening and commodity leverage. Today’s EM and Asia markets are not a monolith; they are a collection of dynamic economies, each contributing uniquely to earnings growth, capital returns, and portfolio diversification. This breadth is critical for global investors seeking to move beyond concentrated developed market mega-cap risk and capture the full spectrum of EM and Asia Pacific growth.
India, while trading at elevated valuations and dealing with a mid-cycle slowdown in economic and earnings growth, is supported by structural reforms, robust balance sheets and a healthy banking system. Here, industrials, financials and consumers are favoured, while non-tech cyclicals provide a hedge to AI exuberance. Our recent white paper, Riding India's growth wave, delves into these themes in detail.
Emerging markets across Europe, the Middle East and Africa (EMEA) bring together resource-rich and reform- minded markets that are uniquely positioned to benefit from global commodity cycles. South Africa, a top exporter of gold and platinum, is gaining from higher metal prices and a firmer rand, while rate cuts support financials and resources. Gulf states such as Saudi Arabia and the UAE leverage oil and gas revenues to fund economic diversification into sectors such as tourism and technology. Nowhere but emerging markets offers such concentrated exposure to global commodity trends, with reforms further enhancing resilience and growth prospects.
Lower rates across Latin America are set to support economic activity and lift consumer sentiment, with stable to lower inflation and relatively low exposure to US trade underpinning a constructive equity backdrop into 2026. Brazil, besides trading at supportive valuations, is expected to be buoyed by significant rate cuts, while Mexico stands to benefit from a resurgence in nearshoring following the renegotiation of the US-Mexico-Canada Agreement (USMCA), with potential GDP upgrades on the horizon.
While EM and Asia Pacific technological prowess has been discussed earlier in the paper as well as our recent white paper, AI tailwinds driving growth in Asia’s tech sector, in terms of countries, South Korea is in the early to mid-stages of a memory upcycle, with High Bandwidth Memory (HBM) and Dynamic Random Access Memory (DRAM) pricing power, rising exports, and governance reforms driving buybacks and shareholder value. Taiwan, with its world-class foundries, AI server and networking expertise, and advanced packaging, remains a critical “picks and shovels” supplier to the global tech cycle.
Emerging markets and Asia are much more than just China and remain under owned in global portfolios. As global capital reallocates and earnings breadth widens, the case for an EM and Asia Pacific allocation – including China, North Asia, South and Southeast Asia, EMEA and Latin America – only gets stronger.
Risks to investing in EM and Asia Pacific equities
Investing in EM and Asia Pacific equities is not without risks. The key risks in current times has been enlisted below. We remain vigilant, using macro signposts and rigorous risk controls to navigate these challenges. Our focus on quality, pricing power, and diversification ensures we are well positioned to capture EM and Asia Pacific opportunities while protecting capital.
Regime shifts and tail risks: The most likely shifts are between inflationary and deflationary booms, but tail risks include runaway inflation, policy shocks, or sudden reversals in global liquidity. We mitigate this by focusing on businesses with pricing power and maintaining a dynamic, data-driven approach.
Currency shocks: EM and Asia Pacific currencies remain sensitive to global capital flows, US dollar strength, and domestic imbalances. Sudden depreciation can erode returns for foreign investors and destabilize local markets.
Geopolitical and policy risks: Persistent geopolitical tensions, regulatory changes, or policy errors can create volatility. Recent examples include US-China relations, Russia-Ukraine conflict, and abrupt capital controls.
Tariff and trade uncertainty: While most EMs are insulated by strong domestic revenue bases (70– 90%), intermittent tariff disputes and trade tensions – especially between major economies – can disrupt supply chains and sentiment.
Commodity price shocks: Many EM economies are heavily reliant on commodities. Fluctuations in oil, metals, or agricultural prices can have outsized effects on fiscal balances, currencies, and corporate earnings.
Momentum crowding and valuation extremes: Leadership in select sectors can lead to crowded trades and stretched valuations, increasing the risk of sharp corrections if sentiment shifts or credit spreads widen.