Global emerging markets are on track for their strongest annual return since 2017, driven by a weaker US dollar and a global rotation into non-US equities, with several catalysts suggesting the rally could continue into 2026, according to Capital Group analysts in a press release.

Earnings growth across most emerging markets appears promising, with four of the five countries comprising 80% of the MSCI Emerging Markets Index projected to increase profits at double-digit rates year on year, according to equity portfolio managers Saurav Jain and Lisa Thompson alongside equity investment director Kent Chan.

The MSCI Emerging Markets Index has trailed global benchmarks including the S&P 500 Index and MSCI World Index by wide margins over 15 years due to slowing Chinese growth, a strong US dollar and dominance of American technology companies.

Central banks in many emerging market countries are positioned to cut interest rates, which may benefit returns in local equity markets. Inflation remains under control, with some countries recording significantly lower rates than developed markets. Many emerging market economies maintain current account surpluses whilst some developed markets, notably the US, run deficits.

Taiwan's TSMC dominates advanced chip manufacturing whilst South Korea's SK Hynix leads in high-bandwidth memory chips essential for AI servers, making emerging market technology companies direct beneficiaries of hundreds of billions of dollars being spent on AI data centre construction. However, cooling AI spending could create headwinds for the tech-heavy emerging market benchmark if order volumes decline.

Regulatory-driven initiatives across Asia aimed at improving profitability, boosting return on equity and divesting non-core assets could help increase valuations and share prices. At least 150 South Korean companies have filed multi-year plans promising tighter capital discipline and larger cash returns since February 2024, with similar programmes underway in China, Taiwan and southeast Asia.

China's macro environment is slowly improving as government officials seek to counter deflation by closing inefficient manufacturing capacity and reducing hyper price competition in certain industries. Greater policy emphasis on high-end manufacturing and leveraging AI to support the economy, combined with de-escalation in the US trade and technology conflict, has created a more positive backdrop.

China's technology sector is thriving again, boosted by AI startup DeepSeek's emergence and supportive government policies encouraging entrepreneurs.

Chinese technology giants hold substantial cash reserves to fuel growth plans for AI and other ventures, with JD.com's cash representing 77% of market value, NetEase at 26% and Trip.com at 25% as of September 30.

Valuations have improved but emerging markets trade at significant discounts to global peers.

South Korea and Brazil trade near their 10-year averages on a forward price-to-earnings basis, whilst multiples for China's leading technology companies have recovered from historic lows but remain reasonable compared to US counterparts.