Photo: Paolo Enrico Monaco © Eurizon
By Paolo Enrico Monaco, Senior Portfolio Manager at Eurizon
Emerging markets remain a key engine of global economic growth. Their annual growth is expected to be roughly twice that of developed economies. At the same time, emerging-market equities continue to trade at a significant discount: the price/earnings (P/E) ratio of the MSCI Emerging Markets index stands at around 12, compared with 19 for the MSCI World index, even though comparable earnings growth of 18% is expected in both markets over the coming year.
Earnings growth is also broadening. In Asia, it now extends beyond technology hardware and semiconductors to include the materials and industrial sectors. This shift is being driven by the expansion of data centres, higher commodity prices and stronger demand for industrial goods. Even within the AI value chain, investor interest is increasingly moving to other segments. AI-related investment is therefore spreading well beyond pure technology stocks.
Against this backdrop, the geographical distribution of earnings growth is expected to change. While South Korea and Taiwan have been the main drivers of earnings growth in 2026, their contribution is expected to decline in 2027, with India and China taking on a more prominent role.
Beyond the large AI and semiconductor names, a range of opportunities and priority themes is emerging in each market. In Taiwan, these include financial services, materials and industrials. In South Korea, they span entertainment, biotechnology, beauty and food, while in China they notably include biotechnology, energy storage and materials. In India, the current investment cycle is being driven by energy, real estate, transport infrastructure, metals and chemicals.
Outside Asia, the picture is equally varied. In Brazil, the focus is less on macro-driven investments. Early-cycle sectors, financial services and utilities are benefiting from improved liquidity, while commodity-related stocks are supported by favourable earnings prospects. Market performance could also receive a further boost if October’s presidential election produces a business-friendly outcome.
These positive prospects are nevertheless tempered by several risks. A stronger US dollar would probably be the main threat to emerging-market equities. It would tighten financing conditions and, in particular, put pressure on the currencies of countries with weaker economic buffers, complicate the conduct of monetary and fiscal policy, and raise the risk of capital outflows. Geopolitical tensions are an additional challenge. They can increase the risk premia demanded by investors and, as the conflict with Iran shows, trigger further inflationary pressure.
Another risk lies in the still-high correlation between emerging-market indices and the global technology sector. Over the past two to three years, their relationship with this sector has changed substantially: emerging-market equities now react more strongly than average to developments in the global artificial intelligence trend and are increasingly taking on the characteristics of a “high-beta” investment. The technology sector alone accounts for more than 40% of the index.
Price gains so far have also been narrowly concentrated: although emerging-market equities posted a solid first-half performance, outperforming developed markets, the gains came largely from just a few markets, particularly South Korea and Taiwan.
At the same time, there are signs of a growing rotation. Investment flows focused exclusively on semiconductors are showing early signs of losing momentum, prompting investors to look beyond the most obvious picks. Combined with the continued strength of global equity markets, this trend gives emerging markets—and the sectors that have so far attracted less attention—the opportunity to benefit from the ongoing broadening of market leadership.
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