Emerging markets poised for regional divergence and sector-driven gains in 2026

Emerging market equities staged a powerful rebound through 2025 and look set to remain a focal point for investors, but prospects vary sharply by region and by the forces that powered last year’s gains.

Global EM indices posted outsized returns in 2025, with the MSCI Emerging Markets benchmark finishing the year markedly higher and localised indices in Asia and Latin America diverging in strength. According to MSCI, the asset class outpaced many developed-market peers as sovereign borrowing costs fell and credit spreads narrowed, a backdrop that also lifted dollar-denominated EM sovereign bonds. Industry data show that easing financing conditions and improved investor sentiment provided broad, macro-level support across numerous emerging markets.

Four macro drivers underpinned the rally: a softer US dollar, lower US Treasury yields as central banks signalled or implemented greater accommodation, declining energy prices, and surprisingly resilient global demand. Those elements combined to cut companies’ funding costs and shrink operating outlays, which in turn supported profit growth and pushed valuations higher. Goldman Sachs Research attributes the continuation of the uptrend into late 2025 to robust corporate earnings, a weaker dollar and investors’ appetite for geographic diversification, projecting further upside for the MSCI Emerging Markets Index over a 12‑month horizon.

Yet the mechanics differ by geography. Emerging Asia’s rebound was driven materially by genuine earnings expansion, not merely multiple expansion. “The dichotomy observed between emerging Asia and Latin America could become more pronounced.” In Asia, technology, semiconductors and other new‑economy sectors accounted for a large share of returns, and earnings forecasts for 2026 are particularly strong for markets such as South Korea and Taiwan. Market commentators point out that semiconductor sales growth in the Asia‑Pacific region outpaced the United States last year, reinforcing the region’s central role in the global chip supply chain. China’s push in artificial intelligence and robotics further bolsters that thematic exposure. As a result, expected earnings growth made a dominant contribution to Asian index performance.

By contrast, Latin American indices benefited more from valuation rerating and commodity‑driven moves than from underlying earnings growth. Banks, miners and energy producers play an outsized role in those markets, leaving them more sensitive to oil and other commodity price swings. That exposure means that a renewed slide in energy prices could reverse some recent gains in commodity‑linked economies. Asset managers have flagged this regional split: while some EM allocators saw strong returns from Brazil and select LatAm positions, others noted that stock selection in China and policy uncertainty tempered performance in parts of emerging Asia.

Policy, reform and starting valuations are also part of the story. Portfolio managers at firms such as Ashmore have noted that structural reforms, improved macro discipline and relatively low entry valuations helped attract fresh capital into the asset class last year. At the same time, active funds recorded mixed results; VanEck highlighted that relative outperformance this year was led by allocation and stock picks in Brazil and Georgia, while China selections detracted, underlining how idiosyncratic outcomes can be across managers and mandates.

Looking ahead, the sustainability of another double‑digit year for EM equities will hinge on several moving pieces. A stabilising rather than weakening US dollar in 2026 could remove a tailwind many investors had assumed, and markets have largely baked in anticipated US interest‑rate cuts. If the dollar holds firmer than expected or if US rates stop declining further, total returns for EM assets could be constrained. Conversely, a continued earnings upswing, especially in technology‑heavy Asian markets, would support further gains even in the absence of an additional substantial currency tailwind.

Not all EM strategies captured the 2025 upside equally. Fund returns varied: some sustainable and thematic funds lagged the broader index despite positive absolute returns, reflecting differences in country and sector exposure. Matthews Asia reported that its Emerging Markets Sustainable Future Fund underperformed the MSCI Emerging Markets Index through 2025 even as it delivered solid returns, illustrating how sector tilts can alter outcomes markedly.

In sum, the macro set that propelled emerging markets in 2025 is not uniform across regions. Asia’s technology and semiconductor exposure offers earnings leverage that could sustain outperformance, while commodity‑dependent Latin American markets remain vulnerable to moves in energy and mineral prices. According to market research and asset‑manager commentary, the path for EM in 2026 is therefore likely to be uneven: attractive opportunities exist, but success will depend on regional positioning, sector exposure and how the dollar and global rates evolve.