With emerging market bonds and equities off to a flying start for 2026 with their strongest monthly return since 2012, BlackRock has said it expects to see further gains.
After a strong 2025, emerging market (EM) equities have carried their momentum into this year, with the MSCI Emerging Markets index climbing nearly 9 per cent last month.
The gain marks the strongest January clip for the asset class since 2012, when EM equities bounced back strongly after a weak 2011 that left stocks very cheap. It also ranks among the largest monthly gains for the asset class in years, comfortably surpassing the 2.2 per cent rise in developed markets.
In its latest Weekly Market Commentary, BlackRock identified several broad factors currently driving EM returns and reaffirmed a positive outlook for the asset class.
These included robust global growth and an ongoing rate-cut cycle by major and EM central banks, with Australia as the notable exception. It argued that this environment is creating a “stable macro backdrop” for EM economies, despite occasional policy-driven volatility.
With trade policy uncertainty easing since last year’s so-called ‘Liberation Day’ tariff announcements, the firm said EMs should continue to benefit from a risk-on stance, supporting capital flows and stronger currencies.
It cited strong investor demand as evidence, with 2025 seeing record inflows of US$152 billion into EM debt ETPs and US$103 billion into equity ETPs, according to BlackRock and Markit.
Meanwhile, BlackRock said it is also seeing mega forces such as AI companies in South Korea and Taiwan trump the traditional macro in EM.
“The AI theme has broadened out to markets like South Korea and Taiwan over the past year, with their strength in manufacturing AI hardware – especially semiconductors – driving gains,” the firm stated.
The recent surge in AI spending plans by US mega-cap tech companies is “another positive”, with Alphabet, Amazon and Meta having announced over US$660 billion ($940 billion) in planned AI investment this year.
Since EM economies are central to the AI buildout – from industrial metals to manufacturing supply chains – it believes they are set to benefit.
“We also see persistent supply constraints pushing up commodity prices, another potential boost for EM – especially Latin America,” it added.
At the same time, while EM performance has now broadened beyond the AI theme, BlackRock noted there is still significant dispersion among the asset class.
While North Asian AI powerhouses such as South Korea have surged 21 per cent, other economies such as India remain behind. This is despite a recent US trade deal that removed a 25 per cent tariff on its exports to the US and lowered the reciprocal tariff to 18 per cent.
Meanwhile, Schroders has noted that roughly half of the countries in the MSCI Emerging Markets index are now expensive compared with historical levels.
However, it emphasised that this varies widely, with AI powerhouses like Taiwan showing a high Combined Z-score of 2.1, while Brazil remains at a neutral 0.0. It added that all markets are now in expensive territory.
Investment response
In response to the differentiation across EM economies, BlackRock argued that investors will be rewarded by an active, selective approach across both equities and bonds.
As such, in equities, it said it is focusing on markets set to benefit from increased AI capex.
“We favour leaders in China’s new economy – AI, automation and renewable energy. We also see the rewiring of global supply chains benefiting Mexico, Brazil and Vietnam, while stronger commodity prices are a boon to Latin America,” BlackRock concluded.
Meanwhile, in bonds, it said hard-currency EM debt remains appealing relative to the themes in developed markets.
“We lean into EM with our overweight to hard currency EM debt. Improved fiscal policy in some large EM countries stands in contrast to our theme of leveraging up happening in DM.”
The asset manager added that it favours high-yield EM issuers and views increased dispersion as creating opportunities for active returns. Highlighting upcoming elections and potential currency volatility – such as Brazil’s October vote on whether President Lula will serve a fourth term – it said this is another reason why it favours EM hard-currency bonds over local currency.