Emerging-market equities opened 2026 on a strong footing, extending last year’s momentum as a renewed surge in Asian technology shares lifted benchmarks to multi-year and, in some cases, record highs. The rally reflects a growing reassessment of global asset allocation, with investors increasingly drawn to emerging markets as artificial intelligence investment accelerates and valuation gaps with developed markets remain wide.

Tech Momentum Pushes EM Benchmarks Higher

The MSCI Emerging Markets equity index climbed to its highest level since early 2021, placing it within striking distance of an all-time high. The move follows a powerful 2025 rally that added an estimated $7.2 trillion in market value, marking the strongest annual performance for emerging-market stocks since 2017 and outperforming major U.S. benchmarks.

Leadership has come squarely from Asia. Chinese technology shares posted their biggest gains in months as enthusiasm built around artificial intelligence development, including progress among domestic AI players and expectations for new listings tied to the sector. In South Korea and Taiwan, chipmakers extended last year’s momentum, pushing local indices to record levels as investors doubled down on the region’s central role in the global semiconductor and data-center buildout.

Shifting Global Allocations Favor Emerging Markets

Beyond short-term momentum, the rally reflects deeper structural forces. After years of heavy concentration in U.S. assets, global investors are increasingly looking to diversify portfolios. With the United States accounting for roughly two-thirds of global equity indices, even modest reallocations can have an outsized impact on emerging markets, where market capitalizations are smaller and liquidity conditions more sensitive to inflows.

Improving fiscal discipline in several developing economies, coupled with more stable inflation dynamics, has strengthened the macro backdrop. This has allowed some emerging-market central banks to consider easing cycles ahead of developed peers, reinforcing the relative attractiveness of local assets.

Currencies Signal Confidence, Not Euphoria

While equity markets surged, emerging-market currencies showed a more measured response. The MSCI index tracking developing-nation currencies edged slightly lower overall, suggesting the equity rally has not yet spilled into speculative FX positioning. Notably, South Africa’s rand strengthened to its highest level since mid-2022, supported by reform momentum, firmer gold prices, and expectations of monetary stability.

China’s offshore yuan rose to its strongest level since mid-2023, aided by a firmer daily fixing from the People’s Bank of China and a broader weakening in the U.S. dollar. These moves point to growing confidence but stop short of signaling the kind of exuberance that often precedes reversals.

AI, Policy, and Valuation Risks Ahead

Artificial intelligence remains the dominant narrative shaping emerging markets in early 2026, particularly across North Asia. However, valuations in some tech-heavy segments are becoming more demanding, raising the risk of sharper pullbacks if earnings fail to keep pace. Federal Reserve policy remains another key variable, as delayed or fewer-than-expected U.S. rate cuts could reintroduce dollar strength and pressure capital flows.

Geopolitical decisions by the U.S. administration, especially around trade and technology restrictions, also loom large. For now, markets appear willing to look past those risks, but sentiment could shift quickly if policy signals turn less supportive.

In the near term, emerging markets are benefiting from a rare alignment of growth optimism, diversification flows, and relative valuation appeal. Whether the rally can extend toward new highs will depend on how durable AI-driven earnings growth proves and whether global monetary conditions remain benign.