Emerging markets faced a mixed third quarter as AI-related volatility and geopolitical tensions tested investor sentiment. Chetan Sehgal, Portfolio Manager at Templeton Emerging Markets Investment Trust, says he remains optimistic about the long-term opportunities across the emerging markets universe.
Overview
Emerging Market (EM) stocks slipped slightly in the third quarter of 2026 against a backdrop of a U.S. Federal Reserve interest-rate hike and continued geopolitical tensions in the Middle East.
For the quarter, the MSCI Emerging Markets Index returned -0.46%. The MSCI World Index delivered 1.79%, both in net UK-sterling terms.
The emerging Asia region declined, with South Korean equities leading regional losses. Technology stocks in both South Korea and Taiwan came under pressure in July following a prolonged period of strong performance linked to the artificial intelligence (AI) boom.
Investors reassessed the potential returns from substantial AI-related capital spending, elevated valuations and rising financing costs.
However, these shares recovered in August and September, supported by substantial shareholder return announcements of key memory companies, alongside still- favourable fundamentals.
Taiwanese equities were more resilient and rose for the quarter. The broader semiconductor and integrated circuit ecosystem were lifted by a global rally in technology stocks.
Chinese equities rose, although performance across sectors diverged. State-backed interventions in the equity market helped to support returns.
However, there was a mild downturn towards the end of the period. The lack of a major breakthrough in US-China talks and macro weakness also weighed on Chinese equities.
Indian stocks declined. Energy price shocks led to an acceleration in inflation, with both annual retail and wholesale prices rising in August.
Leadership and governance uncertainty at a major Indian conglomerate weighed on the share prices of several listed group companies.
Equities in the emerging Europe, Middle East and Africa region advanced. Geopolitical uncertainty and volatility in energy prices picked up towards the end of the period.
Equities in the United Arab Emirates rose after August survey data showed that the country’s non-oil private sector expanded at a solid pace. Polish equities experienced a strong rally.
Equities in the emerging Latin America (LatAm) region ended higher. Brazilian equities performed well.
An improving inflation backdrop – monthly inflation in August posted the steepest decline in four years – paved the way for the fifth interest rate cut in September.
In total, this quarter saw two rate cuts. Mexican equities dipped. This largely reflected weakness in September, with a sharp fall in the peso also weighing on returns in sterling terms.
Outlook
We remain positive on EM stocks. The capital expenditure on AI continues to propel earnings growth revisions for semiconductor companies and indirect beneficiaries within the AI supply chain.
While AI has garnered a lot of focus, returns remain diversified. In EMs, different economies bring about their own growth drivers.
On a more general level, we are also observing more companies extolling capital discipline and improving their shareholder return policies.
The investment case for China involves the global competitiveness of its industrial companies, particularly in areas such as EVs, power equipment and energy-related products.
We are seeing these companies grow across both domestic and export markets. In India, a young population and rising incomes bring about a shift in the way Indians consume.
An example is in the rise of digital consumer businesses. In Brazil, election remains at central stage, and the outcome can be positive for the long-term outlook.
Overall, EM stocks remain well placed for the future. However, fundamentals, government policies and investment opportunities vary widely.
This makes an active, bottom-up investment approach especially important.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: emerging markets, wengang-zhai-81-HeiYXgPA-unsplash
