Emerging markets have enjoyed a strong run this year so an obvious question for wealth managers heading into 2027 is whether they have missed the boat. It may be tempting feel that way – but arguably the better approach for investors would be to look somewhere different for the next leg of the rally.
The artificial intelligence (AI) trade has been a powerful driver of emerging-market returns – particularly through the semiconductor supply chain in Taiwan and South Korea. Beneath the headlines, though, something broader is happening.
Earnings growth is spreading across sectors, while rising investment in defence, energy security, infrastructure and supply chains is creating opportunities in parts of the emerging markets grouping that have received far less attention. The question then is not simply whether emerging markets can keep rising but where the next winners will come from.
“The question is not simply whether emerging markets can keep rising but where the next winners will come from.
Investors who assume the next phase of emerging-market performance will simply repeat the last one risk overlooking some of the most interesting opportunities.”
There is no denying the importance of AI, as Taiwan and South Korea sit at the heart of the global semiconductor supply chain and have benefited from the enormous investment going into AI infrastructure.
Look beyond technology, however, and the earnings picture is broader. Materials, industrials, energy and healthcare are contributing too. That matters because many of today’s biggest investment themes ultimately depend on the physical economy.
AI needs data-centres, electricity and cables, while supply-chain diversification requires factories and logistics networks. Energy security requires new infrastructure, while higher defence spending requires industrial capacity.
A recent visit to South Korea’s shipbuilding industry vividly brought the point home. Shipyards that traditionally focused on commercial vessels are seeing interest in naval capacity from countries including the US, Saudi Arabia, Peru and Morocco.
Under-the-radar outposts
Taiwan and South Korea remain home to exceptional companies but, after the surge of interest in AI and semiconductors, they are hardly undiscovered.
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 sometimes find opportunities.
The same applies across the emerging markets – for example, Mexico, Thailand and parts of Central and Eastern Europe have their own economic, political and corporate cycles. Investors who assume the next phase of emerging-market performance will simply repeat the last one risk overlooking some of the most interesting opportunities.
Defence spending, infrastructure, energy security, supply-chain investment and domestic economic cycles are creating a much wider range of potential winners.”
After years of exceptional US equity performance, global portfolios remain heavily tilted towards US assets, with emerging markets accounting for a much smaller share. That means investors do not need to abandon the US for emerging markets flows to become significant.
Even a relatively modest diversification away from concentrated US exposure could have a disproportionate impact on a smaller asset class such as emerging markets. And those flows would meet a potentially supportive fundamental backdrop, with robust earnings expectations and relatively attractive valuations.
After a strong emerging markets rally, the natural temptation is to ask whether it is too late – and we do not think so. AI will remain important but, alongside it, defence spending, infrastructure, energy security, supply-chain investment and domestic economic cycles are creating a much wider range of potential winners.
As we move closer to 2027, the next leg of the emerging markets rally may not come from the countries and companies that dominated the last one, but from the markets and businesses that have yet to attract the crowd.
Ernest Yeung is portfolio manager of the T. Rowe Price Emerging Markets Discovery Equity strategy
