Emerging Markets: Where to invest as AI leadership broadens

After a strong year for emerging markets, investors looking for continued gains should look to a weakening US dollar and pockets of resilience in China. PAUL WIMBORNE explains

Emerging markets – key insights:

• Weaker US dollar to drive next gains
• Opportunities emerging in China
• Learn more about Pendal Global Emerging Markets Opportunities Fund

Emerging markets are entering a new phase. China’s manufacturing strength and a weaker US dollar should underpin emerging market stocks over the next few years, but investors should look beyond the AI semiconductor cycle for the next leg of growth, says Paul Wimborne, a senior fund manager for Pendal Global Emerging Markets Opportunities Fund.

The MSCI Emerging Markets Index surged more than a third over the year to June 2026, driven mainly by gains in Korean memory-chip makers and Taiwan Semiconductor as global AI capital investment soared.

Wimborne says the recent strength in Korea and Taiwan has been closely tied to the AI cycle, but the next phase of emerging market returns may come from a wider set of opportunities as capacity expands and China accelerates efforts to build a competing semiconductor supply chain.

Instead, emerging markets investors might be better placed broadening their focus to Chinese manufacturing and US dollar-exposed cyclicals like Brazil, Mexico and South Africa.

The AI semiconductor cycle driving emerging markets

“We’re in super cycle with emerging markets, but that will change at some point,” says Wimborne.

“First, if AI capital expenditure budgets start to be reduced. Secondly, all of the big memory companies are starting to increase capital expenditure significantly. We would imagine nearly every company will double capacity in the next three to five years.

“And then, increasingly, Chinese companies – directed by the government – are spending huge amounts of money in building their own semiconductor industry, which isn’t just their own chips, but it’s all the equipment that goes into making the chip factories as well.”

Wimborne says memory chips are “essentially commodity type products”.

“And we certainly think that the memory stocks had reached a point where investors needed to think carefully about the risk and reward, which is why we started to broaden our focus within emerging markets.”

Emerging markets present a Chinese opportunity

Chinese shares look well priced for emerging markets, partly due to the persistently weak domestic economy, says Wimborne.

“One of the key risks, but also why the opportunity is there, is economic growth,” says Wimborne.

“Domestic demand and consumer confidence are very low and have been since COVID.

“But it does mean that China is very cheap. There are some great companies in China that are doing incredibly well, particularly on the manufacturing side. We’ve been increasing our exposure there.”

The Chinese government is also encouraging household savings away from bank deposits and bonds towards the share market.

“So, we’ve bought a position in a brokerage house where the results of that sector have been doing very well for the last few quarters, increasingly more accounts being opened,” says Wimborne.

“We own an insurance company that will benefit if equity returns pick up and then we have a position in Hong Kong Stock Exchange as well.

“There are pockets within China where we think growth is strong for emerging markets, where the companies can thrive.”

Emerging markets see a US dollar tailwind

A weaker US dollar should also benefit cyclical markets such as Brazil, Mexico and South Africa, where the strong dollar has constrained economic and earnings growth for much of the past decade, says Wimborne.

“The time you make the most money in emerging markets is in weak dollar environments,” says Wimborne.

“Emerging markets in strong dollar environments tend to underperform, and we’ve seen that for most of the last 13, 14 years until 18 months ago.

“We think from a cyclical point of view, countries like Brazil, Mexico, South Africa – that borrow money from the rest of the world – are big beneficiaries if you do get a weaker dollar.

“What you’ve had for those countries over the last 10 to 15 years is the strong dollar providing a big headwind to their economic and earnings growth.

“We think that headwind has now turned into a tailwind.”

Wimborne says investors can underestimate the cyclical potential in emerging markets when the US dollar weakens.

He says not only does local currency appreciation add to returns, but multiples expand as investors become more willing to pay to get access.

Local borrowers also benefit from easier to repay US-dollar debt, while stronger currencies also reduce the cost of imports, helping dampen inflation and keeping interest rates lower.

“We think all of those factors will help drive returns to be better in those countries than they have been over the last 10 years,” he says.

Find out about

Pendal Global Emerging Markets Opportunities Fund

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Frequently asked questions 

Why do emerging markets perform well when the US dollar weakens?  

A weaker US dollar is the biggest tailwind for emerging markets. Local currencies rise, share prices lift, and US-dollar debt gets cheaper to repay. It also lowers import costs, which helps keep inflation and interest rates down 

Why is China considered an opportunity in emerging markets right now? 

China’s economy is weak but many companies — especially in manufacturing — are doing well. The government support for the share market is also helping brokers, insurers and exchanges grow. 

What is the outlook for emerging markets in 2026 and beyond? 

Emerging markets over the next few years will be supported by China’s manufacturing strength and a weaker US dollar. There is caution around expensive AI chip stocks in Korea and Taiwan however. 

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
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here