In his quarterly outlook, Chetan Sehgal, Portfolio Manager of Templeton Emerging Markets Investment Trust says that overall, emerging market equities offer valuation support and cyclical tailwinds but within a context of elevated uncertainty and divergence.
Emerging market (EM) equities rose in the first quarter of 2026. Performance was supported by strong gains in January and February, driven by artificial intelligence (AI)-related momentum, before reversing in March as escalating geopolitical tensions and rising energy prices triggered a broad-based risk-off environment.
For the quarter, the MSCI Emerging Markets Index returned 1.83% while the MSCI World Index delivered -1.65%, both in net UK-sterling terms.
The emerging Asia region rose slightly, as domestic strength in several countries managed to dilute global pressures from a burgeoning conflict in the Middle East.
South Korean and Taiwanese equities were strong performers as the AI theme continued to gain traction. Chinese and Indian equities bore some losses.
In China, internet companies weakened on concerns of impact of higher AI investments on free cash flows and uncertainty around potential returns from these investments.
Indian equities fell on rising oil prices, spurring concerns that a prolonged environment on higher oil prices could lead to higher inflation, fiscal deficit and squeeze on corporate margins.
Equities in the emerging Europe, Middle East and Africa region also rose, albeit marginally. The ongoing war in the Middle East has significantly disrupted the region, pushed oil prices higher, and raised the broader economic risk premium attached to Middle Eastern assets.
At the same time, Saudi Arabia has held up relatively better, as it has been spared the worst of the direct conflict and its economy benefits more from sustained higher oil prices.
Equities in the United Arab Emirates (UAE), in particular, were among the weakest performers in the region.
Equities in the emerging Latin America (LatAm) region ended higher, with most countries registering gains. Brazil’s central bank began the anticipated interest rate easing cycle.
Petrobras, Brazil’s largest listed company by market capitalisation, saw its share price rise steadily on expectations of higher earnings due to higher oil prices.
Domestic inflation in Mexico saw a resurgence in early 2026, breaking the central bank’s upper threshold of 4%. Mexico’s central bank continued to reduce interest rates.
Outlook
The outlook for EM equities reflects a mix of improving earnings trends and ongoing geopolitical and structural risks, leading to a more selective opportunity set.
Geopolitics and domestic political cycles continue to influence capital flows, commodities and sentiment, while growth remains uneven across regions and sectors.
At time of writing, tensions in the Middle East seem to have de-escalated with the announcement of a two-week ceasefire. However, this is a near-term de-escalation rather than a resolution, but underlying issues remain unresolved and the situation is still fragile.
We are actively monitoring the situation across geopolitical, energy and market channels. In terms of exposure to the Middle East, we have historically maintained a structural underweight given its economic sensitivity to oil prices and global growth dynamics.
We continue to remain cautious on the Middle East amid ongoing geopolitical tensions. In addition, we believe that there could be longer-term implications for the UAE, particularly through weaker business confidence and potential delays in investment recovery.
On the positive side, structural growth themes are evident, with AI being unarguably one of the key drivers. While there have been bouts of volatility in the AI trade, demand for AI continues to expand.
This is driven by increased uptake, improvements in model performance and widening productivity gains.
As such, several South Korean semiconductor firms have reaffirmed this growing demand, which they foresee to persist through the medium term. Taiwan, South Korea and China are crucial components of the global technology supply chain and stand to benefit, thereby supporting earnings outlook.
The domestic front also brings about a positive backdrop. Brazil has finally embarked on its interest rate reduction cycle, which we have been anticipating for some time.
However, the geopolitical tensions in Middle East could have an impact on the global interest rate trajectory.
South Korea has also seen some positive progress in corporate reforms, the latest being mandatory share cancellation as well as cumulative voting.
Overall, EM equities offer valuation support and cyclical tailwinds, but within a context of elevated uncertainty and divergence. The opportunity set favours active and selective allocation.
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
