Emerging Markets equities entered 2026 with positive momentum following a strong performance in 2025. According to the January 2026 Emerging Markets Outlook published by City of London Investment Management (CLIM), several macroeconomic and earnings-related factors that supported performance last year are expected to remain in place. While dispersion across countries remains pronounced, the asset manager specialisted in Emering Markets (EM) believes the overall backdrop for EM equities continues to be supportive. „Key drivers include a softer US dollar, sustained AI-related investment, and improving earnings momentum across the EM technology sector,“ Justin Kariya, Head of Economic and Market Strategy, notes.
Addressing the dollar weakness over the course of 2025, CLIM sees rate differentials to drive further USD weakness this year if the Fed maintains a dovish stance „This is one factor underpinning our positive EM equity view and helps guide country allocation,“ Kariya explains.
Earnings growth, particularly in technology-related sectors, remains another key pillar of CLIM’s constructive EM outlook. The asset manager highlights the importance of artificial intelligence-related investment across EM supply chains and underlines that “AI remains a core theme,” despite ongoing debate around the pace of US hyperscaler capital expenditure. CLIM expects spending to continue rising over the coming quarters, supporting earnings momentum in markets with significant exposure to semiconductors and hardware manufacturing such as South Korea.
In terms of positioning, CLIM emphasises selective country allocation. South Korea remains its highest-conviction overweight, followed by Taiwan, China, Vietnam, Mexico and the UAE. Stability in China remains important for EM outperformance, the asset manager highlights. While Chinese equities slightly underperformed the broader EM index in 2025, Kariya notes that “China may surprise markets, as seen in September 2024 and January 2025.” Improving earnings momentum, easing currency pressures and supportive policy measures could help restore confidence, particularly in domestic markets. Against this backdrop, CLIM continues to favour exposure to onshore equities, stressing that “A-shares are more domestically owned and therefore less vulnerable to foreign outflows, and potentially more receptive to policy support”.
CLIM also flags several factors that could alter the outlook over the course of 2026. US domestic politics are one source of uncertainty, with the upcoming midterm elections potentially influencing fiscal, trade and energy policy. In addition, developments in global energy markets could affect relative performance within Emerging Markets, as crude prices are expected to remain under pressure amid continued supply surpluses.
Against this backdrop, CLIM stresses that EM performance in 2026 is likely to remain uneven, reinforcing the importance of monitoring policy shifts, geopolitical developments and macro inflection points alongside bottom-up country selection.
Read the full outlook here.
