Emerging markets spent the first half of 2026 riding an AI wave. Now the wave has crashed, and investors are scrambling to figure out what comes next.
The MSCI Emerging Markets Index now trades at 9.9 times forward earnings, less than half the S&P 500's multiple of over 20. That gap is the widest in at least two decades.
The discount comes down to two forces moving in opposite directions: a roaring US AI bull market and a brutal selloff in the Korean and Taiwanese tech stocks that had powered emerging markets higher.
How top-heavy the index became
Just nine companies (mostly Taiwanese and Korean chipmakers plus Alibaba and Tencent) now account for over 40% of the MSCI EM Index.
That is a more concentrated bet than even the S&P 500. Taiwan Semiconductor Manufacturing, Samsung Electronics, and SK Hynix alone represent 30% of the index, and information technology overall accounts for roughly half the allocation.
That concentration created a fast and painful unwind. South Korea's KOSPI index had roughly doubled on the back of massive gains in Samsung and SK Hynix, then shed 40% in just six weeks.
The Korean market triggered circuit breakers six or seven times in a single month. International investors pulled money out of Asia ex-China faster than at any point in at least the prior 16 years, with South Korea shedding over $100B and Taiwan over $44B.
"What we're seeing is that emerging markets, which people used to look to as a source of diversification, are not really a source of diversification anymore. They're right in the centre of the AI boom."
Ashley Lester, MSCI
Where fund managers are moving now
With AI-heavy Asia in turmoil, fund managers are rotating into EM regions that never got the hype in the first place. Latin America is the most cited destination. Brazil trades at just 8.2 times forward earnings, near historic trough levels, even as its banks, telecoms, and other companies produce stable earnings and high dividend yields.
Argentina sits at 8.6 times, and several other markets (Philippines, Dubai, Egypt) are all in single-digit territory.
Money managers at firms including Marlborough Investment Management, Pictet, and Aberdeen Investments have all described trimming AI-linked winners and redeploying into consumer and financial companies in lagging regions.
A burgeoning middle class buying cars, financial products, and services in Brazil or parts of Africa offers a hedge against AI overconcentration, according to an emerging markets fund manager at Pictet.
India is also back on the radar. The Sensex is down 13% year-to-date in dollar terms after capital rotated out toward Korean and Taiwanese chipmakers. That outflow is now reversing, with India increasingly viewed as an economic-growth story that could buffer AI-related risk.
China presents a more nuanced picture. Supply disruptions tied to the Iran conflict recently ended a stretch of factory-gate deflation. Internet giants and large consumer businesses within MSCI China are sitting near valuations last seen during COVID, which is drawing buyers looking for recovery plays.
The macro tailwind helping EM broadly
A soft US jobs report eased expectations for Federal Reserve rate hikes and sent the Bloomberg Dollar Spot Index to a two-month low. EM stocks and currencies both gained at the start of the following week, with the MSCI EM gauge recovering all of the prior week's losses.
A weaker dollar is generally favorable for EM assets, since many developing-country companies and governments carry dollar-denominated debt.
US consumer price data due this week is the next key catalyst. A soft reading would reinforce the dollar weakness that has been lifting EM currencies, led by Indonesia's rupiah.
The case for going beyond the index
The old developed-versus-emerging framework is increasingly strained. The median inflation rate across MSCI EM's 24 countries was 2.5% in 2025, lower than in many developed economies.
Countries like South Korea and the UAE carry income levels comparable to parts of southern Europe, yet remain classified as emerging markets.
For investors, the practical implication is that the broad EM index is a poor proxy for the diversification that EM used to provide.
The iShares MSCI Emerging Markets ETF and the Vanguard Emerging Markets Stock Index fund both track an index where 70% of exposure sits in China, Korea, and Taiwan. Funds targeting the other 30%, countries like Brazil, India, and frontier markets, are where the diversification argument actually lives right now.
