Emerging Markets: Which sectors are driving the EM rally?

Emerging markets have surged over the past year, with broad-based strength across regions and sectors. Pendal’s Global Emerging Markets Opportunities team outlines the drivers that could see this momentum continue

• EM strength is broad and not just tech driven
• History and fundamentals suggest the rally can continue
• Find out about Pendal Global Emerging Markets Opportunities Fund

JUST under a year ago we wrote that “the global economic and political environment remains volatile; but if we were asked what an emerging markets bull market looks like, we would say it looks like this”.

In the 11 months since then, the MSCI EM Index has returned 42.9% (in USD terms), compared with 21% for MSCI World Index and 17.9% for the S&P 500 index.

The MSCI EM Index captures large and midcap representation across emerging markets countries.

The MSCI World Index captures large and midcap representation across developed markets countries.

Both indices cover about 85% of the free float-adjusted market capitalisation in each country.

We have written extensively about the role of the US dollar in driving emerging economies and financial markets.

In 2025, the dollar was significantly weak in the first half of the year but then strengthened against other global currencies in the second half of the year.

That move, combined with a seemingly less volatile US policy environment, has led to questions about what 2026 might bring.

Here we highlight a few observations about the emerging market rally:

It’s not just AI and semiconductors

Undoubtedly this is a substantial part of the much higher returns in the last year –including extremely strong returns from leading semi names in Taiwan and Korea.

This has plenty of potential to continue, given tightness in supply-demand balances in foundry and memory. We retain substantial exposure to these industries in Pendal Global Emerging Markets Opportunities Fund.

However, this is a broad-based emerging market rally.

MSCI Latin America returned 63.9% in those 11 months, MSCI South Africa returned 76.6% and MSCI Eastern Europe 61.1%.

This looks like previous EM rallies

The kinds of markets and stocks that have led previous rallies are generally performing well.

Current-account-deficit commodity markets (Latin America, South Africa) which have done well in previous up-cycles are again performing very strongly.

Higher-beta markets within the more defensive current account surplus markets are outperforming: MSCI UAE +27.6% v MSCI Saudi Arabia +4.0%; MSCI Korea +138.7% v MSCI Taiwan +57.8% (last 11 months in USD terms).

As before, capital-markets-focused businesses in EM – such as exchanges, investment banks, brokerages, life insurers and asset managers – are generally seeing very strong growth in their revenues and profits from increased volumes and activity.

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Pendal Global Emerging Markets Opportunities Fund

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EM bull markets have historically lasted a long time

Asian equities (which were what EM mostly consisted of then) performed very strongly during the US dollar weakness from September 1985 to December 1988.

Emerging markets performed very strongly during the US dollar weakness from May 2002 to May 2008 and again from March 2009 to May 2013.

The US dollar began to decline, and emerging market equities to outperform their developed market counterparts, only a year ago.

The dollar, relative equity valuations, capital flows and history all suggest that there is plenty of room to run.

We don’t build our portfolio from a directional call, but we are aware of the history of the asset class, and our process leads us to prefer parts of the asset class that both should do well and are doing well.

We remain heavily overweight Latin American markets, with a preference for Brazil and Mexico, and are overweight South Africa and the UAE.

We have substantial exposure to capital markets-focused stocks that are benefitting from a reorientation of savings and financial activity towards emerging markets.

We are also significantly exposed to gold and semiconductors. We find much opportunity in the asset class at this time.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
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