Emerging markets continued their resurgence in early 2026, only to be tested by renewed geopolitical shocks. As AI leadership, oil disruption and policy credibility pull markets in different directions, performance has become increasingly uneven. We explore why emerging markets’ resilience is now defined by dispersion and what that means for investors.

Emerging market (EM) equities returned to relevance in 2025 after a long period of underperformance, with Asia ex Japan and broader EM both delivering returns of around 30% in US dollar terms. For global allocators conditioned by a long stretch of US dominance, the shift mattered not just in performance terms, but in how investors think about the opportunity set.

The more important question now is whether that resurgence can endure.

The first quarter of 2026 provided an early stress test. EMs rallied strongly in January and February, led again by South Korea and Taiwan, as confidence in AI demand remained firm and investors tentatively returned to the region’s most liquid markets.

Then came the escalation of the Iran conflict, triggering a sharp drawdown in March that erased those early gains. Yet, within weeks, markets had recovered to pre‑conflict levels. This pattern of volatility is not anomalous, but inherent to the asset class.

Since 2010, the MSCI EM Index has typically endured deep intra‑year drawdowns – averaging around 14% – a reflection of the macro, political and capital flow shocks that have long defined the asset class. More often than not, however, those setbacks have proved temporary. In 9 of the past 16 years, markets have recovered their losses by year‑end. Volatility, in other words, is part of the journey, not a diagnosis, and in many cases, the entry point for the strongest subsequent returns. What appears to be changing is how the market absorbs those shocks, and what happens beneath the surface when they occur.

While EMs are not immune to volatility, that sequence of acute volatility followed by rapid stabilisation suggest EMs are now operating under different dynamics than in past cycles.

Why EMs feel different this time

For Michael Bourke, Head of Emerging Market Equities at M&G Investments, the market’s ability to absorb successive shocks reflects structural improvements rather than sentiment alone. Despite a series of shocks that would historically have strained the asset class including COVID‑19, the sharp rise in US policy rates from 2022, the war in Ukraine and renewed tensions in the Middle East, EMs have proven far more resilient.

That resilience, Bourke argues, owes less to a favourable macro call and more to stronger institutional foundations. Many EM central banks tightened policy earlier and more decisively than developed markets, anchoring inflation expectations and strengthening currencies. As Bourke has noted, EMs today are “a lot more resilient” because institutions are doing “a better job in setting their own paths,” allowing markets to absorb external shocks with less volatility than in the past.

“Many EM central banks tightened policy earlier and more decisively than developed markets, anchoring inflation expectations and strengthening currencies.”

Asia provides a clear illustration of that dynamic. David Perrett, Co‑Head of Asia Pacific Equities, highlights two structural advantages that remain underappreciated in headline narratives: currency competitiveness and interest rate differentials. Post‑pandemic policy divergence has left many Asian currencies at highly competitive levels against the US dollar, he suggests, and close to those seen after the 1997 Asian Financial Crisis, while long‑dated government bond yields across much of the region remain well below US equivalents.

“Many North Asian currencies have probably never been as competitive versus the dollar as they are now,” Perrett notes. And if the gap in long‑term interest rates between the US and Asia persists, he adds, “that has potentially profound implications for relative equity valuations.”

Together, these factors help explain why EMs, particularly in Asia, have weathered recent volatility more effectively than in past cycles, in our view. Lower discount rates underpin equity valuations, while competitive currencies support earnings resilience and strengthen countries’ external positions. At a moment when confidence in developed market policymaking, especially in the US, is increasingly questioned, that combination of policy credibility, currency stability and flexibility has taken on greater significance.

AI concentration, oil disruption and widening market dispersion across EMs

That newfound resilience has not translated into uniform performance across EMs. Instead, the defining feature of EMs in 2026 has been dispersion, both within and across countries, as capital responds unevenly to dominant themes and geopolitical shocks.

Nowhere is this more evident than in North Asia. South Korea and Taiwan continue to dominate headline returns, driven by AI‑related earnings upgrades and pricing power in supply constrained segments such as advanced memory and semiconductor manufacturing. Perrett is clear that much of this performance has been justified. “A large part of what’s happened has been entirely driven by earnings revisions,” he notes, pointing to aggressive pricing by South Korean memory producers and sustained demand for advanced chips in Taiwan.

At the same time, market behaviour has begun to change. “In the last six weeks, there are signs of more bubble‑like behaviour starting to emerge,” Perrett warns, as investors crowd into AI‑linked stocks in search of certainty amid geopolitical noise. That concentration has lifted index performance, but has also increased dispersion beneath the surface.

By several measures, EM benchmarks have rarely been more concentrated. Exposure by country sits at all‑time highs, with South Korea and Taiwan now dominating. Asian markets overwhelmingly drive regional allocation, while IT and Financials together account for around 57% of index weight. Just three stocks – TSMC, SK Hynix and Samsung – now represent roughly a quarter of the index. When leadership becomes this compressed, broad index moves can obscure very different outcomes at the stock, sector and country level.

“By several measures, EM benchmarks have rarely been more concentrated.”

The Iran conflict has reinforced the same dynamic through a different channel. Energy exporters such as Brazil have benefitted from higher oil prices and stronger currencies, while importers including India and Indonesia have come under pressure on earnings and fiscal expectations. Crucially, price action has been far from uniform. “If you drill down, there’s a clear divergence in performance,” Perrett adds. “That dispersion is creating opportunities.”

“If you drill down, there’s a clear divergence in performance,” Perrett adds. “That dispersion is creating opportunities.”

In Southeast Asia, high-quality businesses have been sharply de‑rated on sentiment rather than fundamentals. In India, prolonged underperformance has begun to open opportunities in parts of the market, particularly private sector banks, where valuations have reset despite strong long‑term growth prospects.

China offers a different expression of that same dispersion. It remains a polarising region, but Perrett argues that investor focus has narrowed excessively. “We’re now in the sixth year of a very painful property downturn,” he notes. “What’s interesting is that in the last couple of months, we’re starting to see transactions pick up in Tier‑1 cities and prices stabilise.”

“Leadership at the index level can mask significant divergence underneath, creating both excesses and opportunities, particularly for active investors.”

This is not a return to the excesses of the past decade nor a macro stimulus story. But Perrett suggests that marginal improvement from deeply depressed levels can matter for sentiment, consumption and earnings expectations, especially when markets remain positioned for continued deterioration. In a market defined by dispersion, those early shifts are easy to miss and often mispriced.

Altogether, AI concentration and geopolitical disruption tell the same story. In our view, EMs in this cycle are not fragile, but they are uneven. Shocks are absorbed by the market overall, even as prices diverge across individual stocks and sectors, making selectivity more important than broad exposure.

Resilience expressed through dispersion

What distinguishes the current environment from earlier EM recoveries is not simply valuation support or a weaker dollar. It is the combination of stronger institutional foundations, improved policy credibility and, above all, widening dispersion beneath the surface.

Aggregate markets have become better at absorbing shocks, but outcomes are increasingly determined at the asset and country level rather than by broad market moves. AI concentration and geopolitical disruption illustrate the same point. Leadership at the index level can mask significant divergence underneath, creating both excesses and opportunities, particularly for active investors.

For investors, EMs in 2026 are no longer a single trade. They are markets where resilience coexists with uneven performance, and where returns depend less on blanket exposure and more on how capital is allocated within the opportunity set.