EM Stocks Surge at Start of 2026, South Korea Vows FX Stability

Emerging market equities surged at the start of 2026, building on strong Q3 2025 performance. The MSCI Emerging Markets Index gained 10.64% in the third quarter, driven by progress in US-China trade talks, a Fed rate cut, and investor enthusiasm for AI-related stocks according to GS commentary. South Korea and Taiwan attracted significant foreign inflows, while India faced net outflows according to GS commentary.

South Korean exports are projected to rise for the seventh consecutive month in December 2025, led by strong chip demand for artificial intelligence technologies. The median forecast from economists estimates a 9.0% annual increase in exports, with semiconductor shipments playing a central role.

The surge in EM stocks reflects broader macroeconomic tailwinds. A weakening US dollar and improved earnings forecasts for miners in South Africa contributed to the rally. MSCI Inc reported strong Q3 2025 earnings, beating forecasts with $4.47 EPS, and announced a $3 billion additional share repurchase.

Why Did This Happen?

The rally in EM equities was fueled by several factors. US-China trade talks provided optimism for global trade, while the Fed's rate cut eased financial conditions. South Korea's export outlook improved, with chip demand from AI applications supporting growth.

China's market also saw gains despite softer economic indicators. Government initiatives to boost high-tech sectors and AI adoption helped offset weaker retail and industrial data according to GS commentary. Meanwhile, India's economy showed resilience, with GDP growth exceeding expectations.

How Did Markets React?

Investor sentiment turned positive as earnings forecasts improved. MSCI Inc's shares rose 3.78% in Q3 after beating earnings estimates. The company also expanded its stock buyback program, signaling confidence in its future according to investing.com.

South Korea's export data reinforced market optimism. The government announced plans to stabilize the foreign exchange market, reassuring investors amid global uncertainties. Foreign inflows into EM markets reached $10 billion in Q3, with Taiwan and South Korea benefiting the most.

Analysts noted that while chip exports remain strong, other sectors such as steel and automobiles face headwinds from US tariffs and competition. The global manufacturing capex cycle remains weak, limiting broader momentum.

What Are Analysts Watching Next?

Market participants are monitoring South Korea's December trade data, scheduled for release on January 1, 2026. A widening trade surplus could further boost investor confidence in the region.

MSCI Inc's fourth-quarter earnings and AI-related initiatives are also in focus. The company plans to integrate AI across various sectors, potentially reducing operating expenses by 5-15%.

North Korea's recent missile tests and nuclear submarine development add geopolitical risks to the region. South Korea's military and US alliance remain key safeguards against potential provocations according to ABC News.

Investors are also watching China's digital yuan developments. The central bank plans to allow commercial banks to pay interest on e-CNY wallets starting January 1, 2026. This shift could expand the digital currency's role beyond cash substitution.

For emerging markets, the combination of macroeconomic strength and structural reforms offers a mixed outlook. While AI-driven growth and export momentum remain positive, external risks such as US protectionism and geopolitical tensions could pose challenges. The coming months will test whether the rally can be sustained.