Emerging market stocks rose in May on easing geopolitical tensions and expanding AI enthusiasm, although performance varied widely and risks persist. Chetan Sehgal, Portfolio Manager of Templeton Emerging Markets Investment Trust shares an overview of May and an outlook to move forward with.
Emerging Market (EM) stocks rose in May 2026, helped by two main drivers. Hopes for a US–Iran peace deal lifted sentiment. At the same time, the artificial intelligence (AI) theme spread beyond the leading technology firms. For the month, the MSCI Emerging Markets Index returned 10.57%.
The MSCI World Index delivered 5.40%, both in net UK-sterling terms.
The emerging Asia region advanced in May, led by North Asia. Taiwan and South Korea benefited from continued enthusiasm for AI infrastructure.
Demand for advanced semiconductors, high-bandwidth memory (HBM) and AI server supply-chain components supported earnings expectations.
Broader risk appetite improved late in the month on hopes for a US-Iran peace deal, which eased oil prices. However, performance was not uniform.
Chinese stocks faced pressure after regulators tightened enforcement on cross-border trading through offshore brokers.
This weighed on parts of the market, particularly online brokers and selected ADRs (American Depositary Receipts). However, chip stocks rose on signs of domestic progress in the sector.
This could help narrow the gap with global leaders. Indian stocks rose slightly on better sentiment from US–Iran talks. Indonesian stocks fell after MSCI removed six firms from its index.
Equities in the emerging Europe, Middle East and Africa region posted small gains. Hopes for a halt in fighting supported sentiment, especially in oil importers like Poland, South Africa and Hungary.
Turkey diverged negatively after a court ruling against the opposition leadership weighted on local equities.
Equities in the emerging Latin America (LatAm) region ended lower. Brazil led regional losses. Falling oil prices weighed on its state-backed oil company Petrobras.
This reversed part of the earlier commodity-led rally. Expectations of higher interest rates for longer and lingering political and fiscal uncertainty ahead of elections also weighed on sentiment.
Mexico was more resilient after its central bank cut interest rates, following easing inflation pressures in April.
Outlook
We remain constructive on EM equities, but our approach is selective. Long-term growth drivers remain intact, supported by AI, digitalisation, energy demand and industrial upgrading.
At the same time, we are not complacent about risks from slower global growth, higher rates, policy shifts and geopolitical tensions.
North Asia remains central to the opportunity set. Taiwan and South Korea play critical roles in semiconductor and hardware supply chains.
They benefit from demand for advanced logic chips, memory and broader AI infrastructure. We also see opportunities beyond the largest technology names.
These include EM companies supplying power equipment, cooling systems and other components. These are used in data centres and AI systems.
China remains important in EVs and batteries. Selectivity is needed, given competition and weaker domestic demand in some areas. LatAm remains supported by attractive valuations, strong commodity prices and the region’s rate cut cycle.
Key risks include a delay in hyperscaler spending, higher interest rates, rising energy prices and geopolitical escalation.
These could weigh on earnings, tighten financial conditions and reduce risk appetite, particularly in more vulnerable EM economies.
Overall, EM valuations remain attractive and earnings quality has improved.
We believe structural growth themes can support long-term returns, but wide dispersion across markets means we continue to focus on companies with strong balance sheets, durable earnings and valuation discipline.
Main image: emerging markets, wengang-zhai-81-HeiYXgPA-unsplash
