The Case for Emerging Markets in 2026: A Strategic Shift in Global Equity Allocation

The global investment landscape is undergoing a seismic shift, with emerging markets (EMs) poised to outperform developed economies in 2026. This outperformance is driven by a confluence of three transformative forces: accelerating AI adoption, U.S. dollar weakness, and structural reforms. Together, these factors are creating a compelling case for portfolio rebalancing toward EM equities, offering both growth potential and diversification benefits in an increasingly fragmented world.

AI Adoption: A Catalyst for Productivity and Economic Resilience

Emerging markets are rapidly closing the AI gap with developed economies, positioning themselves as key beneficiaries of the next wave of technological disruption. According to the 2025 AI Index Report, 78% of organizations globally reported AI adoption in 2024, up from 55% in 2023, with 71% using generative AI in at least one business function. In emerging markets, this trend is amplified by aggressive infrastructure investments. For instance, global AI data center spending reached $57 billion in 2024 and is projected to surge to $236.4 billion by 2025, driven by countries like India, Brazil, and the UAE. India alone is targeting $20–22 billion in AI market value by 2027, supported by a 27 percentage point increase in organizational AI adoption in Greater China.

The productivity gains from AI are already materializing. The Federal Reserve estimates that generative AI has boosted U.S. labor productivity by 1.3% since its introduction, a trend that could replicate in emerging markets as infrastructure scales. This is particularly relevant for sectors like semiconductors and AI infrastructure, where EMs are becoming critical nodes in global supply chains.

U.S. Dollar Weakness: A Tailwind for EM Equities

The U.S. dollar's structural decline in 2025 has been a game-changer for emerging markets. The MSCI Emerging Markets Index surged 33% in USD terms through October 2025, nearly double the S&P 500's return. This outperformance is driven by three factors:
1. Improved risk appetite: Global investors are reallocating capital to EM assets as U.S. growth premiums erode and debt burdens rise.
2. Currency tailwinds: A weaker dollar reduces EM debt servicing costs and enhances returns for foreign investors according to Goldman Sachs.
3. Structural shifts: Central banks and sovereign wealth funds are diversifying away from dollar assets, accelerating capital inflows into EM equities.

Goldman Sachs forecasts EM stocks to deliver 16% returns in 2026, fueled by falling interest rates, Chinese export strength, and earnings growth. This momentum is further supported by EMs' resilience during global shocks, such as U.S.-China trade tensions and AI sector volatility, where the MSCI EM index outperformed the S&P 500 during downturns.

Structural Reforms: Building Long-Term Competitiveness

Emerging markets are also leveraging structural reforms to enhance economic resilience and attract investment. The IMF's World Economic Outlook notes that EMs and developing economies grew 4% in 2025 and are projected to maintain 3.1% growth in 2026, outpacing developed markets. Argentina's fiscal consolidation, for example, led to its first primary surplus in a decade and a projected inflation drop from 29.4% to 13.7% by 2026.

Reforms in tax policy, privatization, labor markets, and capital account liberalization are boosting competitiveness. India's policy-driven momentum and China's "anti-inflation" reforms are addressing deflationary pressures, while regional integration and private investment are deepening EMs' resilience. These changes are supported by a shift in capital flows: private and blended financing is now critical to bridging the $7.5 trillion annual gap in development and climate projects.

Synergy: A Perfect Storm for EM Outperformance

The interplay of AI adoption, dollar weakness, and structural reforms creates a self-reinforcing cycle for EMs. AI-driven productivity gains in sectors like semiconductors and infrastructure are attracting capital inflows, while dollar weakness reduces borrowing costs and amplifies returns. Structural reforms, in turn, create a stable environment for long-term investment.

For example, China and India are leveraging AI and policy reforms to dominate global tech supply chains, while the UAE's sovereign investments in Microsoft and Oracle underscore a broader trend of digital sovereignty. Meanwhile, the MSCI EM index's 7.4% year-to-date return in 2025 highlights the market's ability to balance volatility from AI-driven sectors.

Strategic Implications for Investors

The case for rebalancing portfolios toward EM equities is clear. By 2026, EMs are expected to outperform on three fronts:
1. Growth: AI and structural reforms are driving productivity and earnings expansion.
2. Diversification: EMs offer a hedge against AI sector volatility and U.S. market concentration.
3. Valuation: EM equities trade at a discount to global indices, offering upside potential as capital flows normalize.

Investors should prioritize EMs with strong AI infrastructure, structural reform momentum, and currency tailwinds. This includes markets like India, China, and the UAE, as well as regional leaders in semiconductors and green energy.