After a volatile July for emerging markets, Chetan Sehgal, Lead Portfolio Manager at Templeton Emerging Markets Investment Trust, explains why he remains confident in the long-term opportunities across the asset class.
Emerging Market (EM) stocks fell in July 2026. Renewed tensions in the Middle East increased market volatility.
Technology stocks came under pressure as investors reassessed the potential returns from substantial artificial intelligence (AI)-related capital spending and elevated valuations.
For the month, the MSCI Emerging Markets Index returned -4.41%. The MSCI World Index delivered -0.87%, both in net UK-sterling terms.
The emerging Asia region slipped. Technology stocks in both South Korea and Taiwan sold off following strong gains linked to the AI boom.
Concerns about returns and sustainability of AI investments, together with forced deleveraging amplified the declines. The Bank of Korea also raised its benchmark interest rate for the first time in three-and-a-half years.
Indian equities rose marginally. Domestic information technology stocks bucked the global trend and performed well. Chinese stocks also rose as internet stocks staged a recovery towards the end of the month
Equities in the emerging Europe, Middle East and Africa region posted small gains. Stock indices in the Middle East markets were mixed with Saudi Arabian equities falling after renewed regional tensions weighed on sentiment.
In South Africa, inflation picked up more than expected. While this reinforced expectations of a second consecutive interest rate hike, the South African central bank held rates.
Equities in the emerging Latin America (LatAm) region ended higher. Brazilian equities rose as a softer-than-expected mid-July inflation reading reinforced expectations that the central bank could continue reducing interest rates.
Two of Mexico’s largest companies, mining and railway operator Grupo Mexico and banking firm Grupo Financiero Banorte, saw their share prices rise following strong results. This helped to anchor the Mexican equity market.
Outlook
EM equities experienced heightened volatility in July, with South Korean equities particularly affected following strong gains earlier in the year.
The correction reflected concerns on returns of AI-related capital expenditure, valuations in parts of the market, rising funding rates and an unwinding of leveraged positions.
While the volatility could continue, our investment approach avoids identifying market peaks or troughs. Instead, we continue to invest in companies where fundamentals, competitive positions and valuations justify risks.
We continue to view AI as a long-term theme for EMs. Within memory, we see structural growth drivers for high-bandwidth memory, supported by expanding AI applications and rising memory requirements.
HBM also has higher technical and customer-qualification barriers than conventional memory, reflecting complex manufacturing, advanced packaging and increasingly customised designs
The EM growth opportunity extends beyond AI. The expansion of EVs, renewable energy and energy-storage capacity is increasing the need for grid investment, supporting demand for SF6-free switchgear (which uses alternative insulation and technologies instead of sulphur hexafluoride), energy-storage systems and power-management solutions. Digitalisation and consumption represent additional long-term themes.
We believe structural growth themes can support long-term returns.
Given the wide dispersion across markets, we continue to focus on companies with strong balance sheets and durable earnings, while maintaining our valuation discipline.
Main image: emerging markets, Singapore, chuttersnap-KwJ5ScBL4gc-unsplash
