The Case for Emerging-Market Equities in 2026: Why China and AI-Driven Markets Are the New Frontier

The global investment landscape is undergoing a profound realignment in 2026, with emerging markets-particularly China and AI-driven economies-emerging as pivotal growth engines. Strategic asset allocation frameworks are increasingly prioritizing these markets, driven by macroeconomic re-rating events and the transformative potential of artificial intelligence (AI). For investors seeking to capitalize on structural shifts, the confluence of policy support, technological innovation, and undervalued equities in these regions presents a compelling case.

China's 5% GDP Growth: A Policy-Driven Resilience

China's economy is projected to grow at 5% in 2026, a figure underpinned by aggressive fiscal stimulus and a strategic pivot toward consumption-driven growth. This forecast, echoed by Goldman Sachs and Morgan Stanley, reflects confidence in the government's ability to counteract headwinds such as the property market slump and deflationary pressures. Front-loaded policy measures, including consumer subsidies and infrastructure spending, are designed to stabilize demand while fostering long-term productivity gains. Crucially, AI is emerging as a critical growth driver, with Vanguard noting its potential to offset economic shocks and accelerate productivity across sectors. Morgan Stanley and BofA Global Research further highlight AI's role in boosting business investment, reinforcing its centrality to China's economic strategy.

AI as the Catalyst for Emerging-Market Re-Rating

The macroeconomic re-rating of emerging markets in 2026 is inextricably linked to AI adoption. S&P Global Research underscores that AI-related exports in Asia are outperforming expectations, driven by China's rapid advancements in domestic chip technology and large-scale AI model development. These innovations, supported by state-backed infrastructure, position China to challenge U.S. dominance in the AI sector. Meanwhile, global trade dynamics are shifting: the U.S.-China trade truce has eased some tensions, including reductions in fentanyl-related tariffs according to ABN Amro, while AI-driven cleantech and manufacturing exports are gaining traction as noted in ABN Amro's research.

For investors, the re-rating of emerging-market equities is further amplified by valuation arbitrage. Despite these markets' strong fundamentals, EM equities trade at a 32% discount to developed markets based on next-12-month P/E ratios. This undervaluation, coupled with improved earnings outlooks and accommodative global monetary policies, has spurred a renewed interest in Chinese assets. Foreign ownership of Chinese equities, currently 53% below 2020 highs, suggests significant upside potential as institutional investors re-engage.

Strategic Asset Allocation: Targeting AI and Policy-Driven Growth

Strategic asset allocation in 2026 must account for the dual forces of AI innovation and macroeconomic re-rating. BofA Global Research emphasizes that AI is the dominant growth driver in both developed and emerging markets, with Information Technology and Communication Services leading the charge. In China, this trend is amplified by government initiatives such as the Five-Year Plan, which prioritize AI integration into manufacturing, healthcare, and financial services.

Moreover, the global shift toward AI has created a divergence in trade dynamics. While U.S. large-cap tech stocks dominate headlines, emerging markets are leveraging their role as the "factory of the world" to scale AI-driven production. This duality-where AI fuels both technological leadership and export competitiveness-positions China and other AI-driven markets as key beneficiaries of capital reallocation.

A Macro-Friendly Environment for Re-Rating

The macroeconomic backdrop for emerging markets has improved markedly. Global growth is stabilizing, and U.S. rate cuts have provided EM central banks with greater flexibility to support domestic growth according to S&P Global. ABN Amro's Global Outlook 2026 notes that easing trade tensions and a more accommodative U.S. policy stance are reducing risks to EM growth. However, challenges persist, including the use of non-tariff trade measures and geopolitical uncertainties. These risks, while significant, are being offset by the resilience of AI-driven sectors and the structural undervaluation of EM equities.

Conclusion: A New Frontier for Investors

The case for emerging-market equities in 2026 hinges on three pillars: China's policy-driven 5% GDP growth, the transformative impact of AI on productivity and trade, and the macroeconomic re-rating of undervalued assets. For investors adopting a strategic asset allocation framework, these markets offer a unique combination of growth potential and valuation appeal. As AI continues to redefine global economic dynamics, China and its AI-driven counterparts are poised to become the new frontier for long-term capital appreciation.