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        How is AI reshaping emerging market equity opportunities?

        In our 2026 Market Outlook, we hold a broadly constructive outlook on emerging market (EM) equities based on global growth, loose liquidity, and a weaker US dollar. We also set out how AI-led productivity growth is bullish for EM countries such as India, Saudi Arabia, and the UAE, where governments are helping facilitate new AI development and infrastructure.

        4 min read
        Ryan Reardon profile picture
        Ryan Reardon
        Senior Equity ETF Strategist

        This is a theme we also discussed in our Q4 Broad Equity Compass, which specifically highlighted the strong combination of earnings-per-share (EPS) growth and undemanding valuations. In November, European investors allocated nearly $4.5 billion into EM equities, bringing the total year-to-date amount to $32.5 billion of net inflows. Approximately $1.2 billion of EM inflows this year have gone in enhanced active strategies, which are more selective ETFs designed to generate excess return for investors.1

        • Analysts have raised 2026 EPS growth estimates for nearly 60% of EM countries, since June, pushing EM earnings projections above those of non-US developed markets.2
        • Despite these improving fundamentals, EM equities remain notably undervalued compared to developed peers — trading at a 32% discount based on next-12-month price to earnings (P/E).3 
        • AI-driven productivity gains extend well beyond US borders. EM in particular, offers a strong AI-led growth profile and more reasonable valuations than broad global equities. 
        • Emerging markets enter 2026 with strong momentum after outperforming all regions in 2025 — despite global trade tensions and US policy uncertainty — EM equities may remain well-positioned for further gains.

        Improving global growth, increased liquidity through fiscal and monetary policies, tamer inflation, and a softer dollar backdrop support a constructive outlook for emerging markets. A weaker US dollar provided a tailwind in 2025 but the primary drivers of EM performance were positive sentiment around AI development, improving earnings outlooks, and a valuation re-rating. These tailwinds are likely to persist in 2026, reinforced by easing trade friction.

        We have a constructive view on EM overall but we recognise some challenges. China aspires to boost domestic consumption, but high savings and weak spending reflect low consumer confidence in property prices, employment, and social security reforms. The IT sector and AI investment are critical to sustaining equity market performance, but questions persist around the quality and monetization of innovation, where China holds an energy advantage, but lags in the development of advanced chips.

        While AI adoption and shareholder return initiatives provide tailwinds, investor sentiment remains sensitive to policy and macroeconomic developments. A selective approach is warranted amid uncertainty around the sustainability of earnings growth, the degree of policy dependence, and the concentration of market leadership in a few sectors.

        How can investors navigate these themes?

        For investors seeking to gain exposure to large-, mid- and small cap stocks in emerging markets, consider EMRD | SPYM : SPDR® MSCI Emerging Markets UCITS ETF. At 18 basis points (bps) and with $1.3 billion in AUM, this core index fund offers an efficient tracking of the equity market performance of emerging markets. Investors can also access a more targeted exposure in Asian EM equities through the EMAS | SPYA : SPDR® MSCI EM Asia UCITS ETF.

        For investors seeking a potential for excess return, enhanced active strategies target the ‘sweet spot’ of returns by maximizing potential excess return per unit of risk in a fee efficient manner, using our proprietary alpha model which generates expected excess return forecasts for +23,000 stocks daily. State Street Investment Management’s enhanced active investment team has an established track record of strong performance relative to the benchmark and to peers, including in emerging markets equities.

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