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Emerging markets are often treated as a single trade. That is increasingly difficult to justify. The first half of 2026 has demonstrated just how wide the opportunity set has become and how important it is to look beyond headline market returns. While South Korea and Taiwan surged on the back of the AI investment cycle, many other emerging markets remained under pressure. For investors, this divergence is creating opportunities. The AI investment cycle has highlighted an important reality: many companies at the forefront of technological innovation are based in emerging markets. Asia remains particularly attractive, but the strongest opportunities are not necessarily found among the stocks that have already delivered the biggest gains. The challenge is distinguishing between companies with sustainable earnings growth and those where expectations have become excessive. Technology has been a major driver of emerging market returns this year. In the second quarter, South Korea returned 88% and Taiwan 49%, together accounting for 45% of the benchmark. Several South Korean and Taiwanese companies exposed to stronger AI-related demand rallied sharply. That strength is impressive, but it also warrants caution. For example, memory stocks have benefited from tight supply and price increases, particularly in high-bandwidth and advanced dynamic random-access memory products. Yet the sector is cyclical. Eventually, additional supply will come into the market, bringing an end to exceptionally high earnings. This does not mean the AI opportunity is over. There are still companies in the sector that offer strong earnings growth at reasonable prices. But after such a powerful rally, investors need to be increasingly selective about what they are paying for that growth. Emerging markets offer something that is easy to overlook when attention is concentrated on the AI winners. Some of the most interesting opportunities are outside technology. Low valuationsEmerging market consumer stocks have been particularly affected by subdued consumer conditions, creating what appears to be unusually low valuations in parts of the sector. There are high-quality Asian consumer companies trading at low valuations, paying high dividend yields and operating in countries with fast-growing populations. Indonesia is a notable example. Selected high-quality companies were trading at their cheapest valuations since the 2008 global financial crisis. Financials are another area where valuations have become more attractive. In Brazil, Mexico and Indonesia, financial stocks have derated as bond yields have risen. The contrast with parts of the technology market is striking. While some AI-related companies have seen valuations rise sharply, other businesses with attractive long-term fundamentals have become cheaper. That creates a fertile environment for stock selection. The first half of 2026 has made the case for looking at emerging markets on a company-by-company and market-by-market basis. The performance dispersion has been significant. While South Korea and Taiwan benefited from the AI-led rally, the remainder of emerging markets returned negative 12% in the second quarter, mainly driven by China, Brazil and Indonesia. This divergence shows why simply looking at the overall emerging market index can obscure the opportunities beneath the surface. An active approach allows investors to look for companies with higher earnings growth through the AI cycle while also considering businesses that have been overlooked by the market and now offer attractive valuations and dividend yields. That matters particularly when valuations vary so widely across sectors and markets. The emerging market investment story is therefore becoming less about making a broad call on the asset class and more about identifying where fundamentals and valuations are misaligned. The AI investment cycle remains a powerful growth driver, and there are companies benefiting from it whose earnings growth still appears attractive relative to their valuations. But some of the most extreme winners now look expensive. At the same time, many consumer stocks are trading at their lowest valuations in some time, while financials have also derated. For investors willing to look beyond the headline winners, this creates an opportunity. Emerging markets are not a single trade and their diversity is precisely what makes them interesting. The first half of 2026 has shown that returns can become highly concentrated in a small group of companies and markets. It has also shown that opportunities can remain elsewhere. The next phase of the emerging market story may therefore be less about chasing the biggest winners and more about identifying what the market has yet to fully recognise. • Byrne is a portfolio manager at M&G Investments.
