Emerging Markets Stocks Can Balance Volatility from the AI Trade
- Goldman Sachs Research forecasts that emerging-market stocks, on pace for their best annual performance in eight years, will return roughly 16% in 2026.
- Falling interest rates, Chinese export strength, and earnings growth are among the tailwinds propelling equities in these markets.
- Regional diversification provides investors a way to moderate selloffs in the AI sector.
Emerging markets were a big upside surprise in 2025, even relative to strong expectations. Driven by strong earnings across regions and favorable macroeconomic trends, stocks in the developing world are on pace to record their best year since 2017, according to Goldman Sachs Research. A key benchmark, the MSCI Emerging Markets Index, is on track to return nearly 30% this year.
This is going to be a tough act to follow, says Kamakshya Trivedi, chief foreign exchange and emerging markets strategist at Goldman Sachs. “Looking ahead, the performance obviously sets a very high bar to replicate,” Trivedi says. “But some of the tailwinds present in 2025 are going to repeat in 2026, so we still expect good returns after a great 2025.”
Those tailwinds include the resilience of China’s exports, a weakening US dollar, and the economic benefits of falling commodity prices. Trivedi forecasts that emerging markets in 2026 will rise about 13% in terms of price, and roughly 16% on a total return basis.
What’s striking in the current cycle, he says, is how the breadth of emerging markets is providing investors with a way to moderate the sudden reversals in the US stock market stemming from the concentration in artificial intelligence (AI) and technology stocks. The asset class’s regional diversification brings balance to portfolio allocation, Trivedi says, especially as macroeconomic conditions are improving in the developing world.
We spoke with Trivedi about the outlook for emerging markets, how rate cuts by the US central bank will ripple through these assets, and the diversification these securities may offer investors. In addition, Trivedi described how China is “exporting disinflation” to other markets, and why lower commodity prices can be beneficial in developing nations.
How will emerging markets build on the performance of 2025?
The combination of unchallenging valuations and a favorable macro backdrop boosted performance in 2025. We’ve seen central banks easing interest rate policy across a whole range of emerging markets. And despite tariff-related volatility across many emerging markets, they have proven to be very resilient. We expect more of this in the coming year—resilient growth and further easing across emerging markets.
The geographic diversification that emerging markets offered throughout the year is also very important. In the first quarter, stocks in emerging Europe increased 17%. In the second quarter, South Korea and Taiwan recorded a 28% performance. Then outperformance shifted to China and South Africa in the third quarter, where stocks increased around 20% in each market. As we look ahead, that geographical diversification should help again.
We expect the bulk of the returns in emerging markets in 2026 to come from rising earnings. Technology was the leading sector in emerging markets this year, especially in the north Asian markets of South Korea and Taiwan, and in China, where the rally has been powered by the AI theme. We expect another strong year: Earnings per share are expected to increase 37% in the region’s technology hardware and semiconductor sectors and almost 15% in the internet, media, and entertainment sector.
How have emerging markets responded to shocks such as US credit concerns or volatility in the AI and technology sectors?
This year we noted how emerging markets, as measured by the MSCI EM index, have become more resilient to global shocks and have responded less severely than they have historically. When concerns mounted—both in October on renewed US-China trade tensions and in November about a possible bubble in AI—and triggered a sell-off in US stocks, the index declined less than the S&P 500 on average.
The nice thing about emerging markets as an asset class is regional diversification. In terms of portfolio allocation, we want to balance technology sectors that have been doing very well with markets such as Brazil and India that are less tech-oriented but have interesting growth stories of their own.
Take South Africa, for example. You have strong profitability in mining, which reflects the strong performance of precious metals globally this year. South African equities rose 60% by December. Good things are also happening domestically in South Africa. There is fiscal consolidation for the first time in years. In November, South African debt was upgraded. And the central bank has reduced its inflation target, so there is also room for outperformance in the more domestic sectors.
So, when you get AI and tech-related jitters in the US market and periodic pullbacks, you get a really nice way to balance the risk with emerging markets. This also applies within emerging markets themselves. As we’ve discussed, China, South Korea, and Taiwan are very strong on tech. But you can have a barbell approach with tech-heavy exposure on one side and more idiosyncratic and domestic exposure on the other side. This can provide resilience.
Speaking of resilience, how will China’s export economy impact the fortunes of emerging markets in 2026?
It’s been really striking this year how strong China’s exports have been despite tariff-related pressure. I think this reflects the nation’s strong manufacturing base and the significance of its cost advantages. China has moved up the value chain by increasing its manufacturing of capital goods such as cars, solar panels, and machinery. It’s no longer just clothes and toys. So now China is a significant competitor in capital goods exports.
This is a mixed blessing for emerging markets, and indeed, the rest of the world. On the one hand, China has this tremendous competitive advantage and that can be challenging for manufacturers in other nations. On the other hand, China is contributing to structurally lower inflation in a number of emerging markets by exporting cheaper goods, especially capital goods. Put another way, China is exporting disinflation. While there are significant challenges for competing firms as prices fall, at a micro level that can boost profit margins and at the macro level it allows policymakers to ease policy. This is ultimately good for earnings.
This China disinflation shock is also a key reason why bond markets in emerging markets have done so well. Fixed-income securities denominated in local currencies are on track for one of their strongest performances in recent history. It isn’t just China—US monetary easing, the weak dollar, and falling commodity prices are also factors. In 2026, we expect to see inflation further normalize closer to central bank targets.
How will the Federal Reserve’s expected rate cuts affect emerging markets?
First, lower US rates ease global financial conditions and create room for other emerging markets and central banks to cut if they need to. We think there are going to be more cuts to come across a whole range of emerging markets. The biggest example is Brazil, which has yet to start its rate-cutting cycle. The same is true in South Africa. We think those are two domestic markets that will strengthen as we get easier monetary policy and lower rates.
Second, lower US rates tend to put downward pressure on the dollar and upward pressure on emerging market currencies. That will add to the total return in any type of underlying asset that you have, whether it's equities or bonds. I think both of those channels are going to be in play going forward.
Why do lower commodity prices help emerging markets?
Commodity prices tend to be a bigger driver of inflation in emerging markets than developed markets. So a more subdued commodity-price dynamic is helping keep prices in emerging markets relatively low. This is a big part of why central banks in emerging markets are feeling more comfortable now in lowering interest rates. The tailwind from lower commodity prices, particularly from lower oil prices, has been especially important for local currency bond markets.
Taken together, how are these tailwinds affecting the risk outlook for emerging markets?
Emerging markets are often thought of as a classic risk market. Investors tend to reach for emerging markets exposure when they are feeling good about risk. Inflows into these markets are greater when risk sentiment is buoyant. After wariness around US tariffs eased in the second quarter, for example, we saw more than $45 billion in inflows into emerging markets between April and October. Even so, global mutual funds are still underweight in the asset class.
I do think that emerging markets assets have matured in the sense they have generally demonstrated more resilience. They are able to perform even during downturns in developed markets. We expect the global economy to continue to expand in 2026. And while equity valuations are more challenging, we think that, as the cyclical macro picture remains supportive, equity markets can make further progress.
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