Key Takeaways
- Emerging market stock strategies are on track for their best year since 2016, largely thanks to the AI boom.
- Samsung, Taiwan Semiconductor, Alibaba, and Tencent have led gains in key emerging market indexes.
- The weight of Taiwan Semiconductor, the MSCI EM index’s largest stock, has doubled in two years, highlighting concentration risk.
After years of underperformance, emerging market stock funds are on track for their best year for nearly a decade, led by the same trend that has fueled the rally in the US stock market: The artificial intelligence boom.
Key AI-related stocks in Korea, Taiwan, and China have been leading the charge. That includes Samsung Electronics 005930, up 79%, and Taiwan Semiconductor Manufacturing (TSMC) 2330, up 33%, which are a vital part of the AI ecosystem, and deals with Nvidia NVDA and OpenAI have pushed these stock valuations higher. A reshuffling of global investor portfolios away from the US has also boosted the case for emerging markets, as well as weakening in the US dollar this year.
Xtrackers MSCI Emerging Markets XMME, which tracks the MSCI Emerging Markets index, is up nearly 30% in GBP so far in 2025. The ETF has a Morningstar Medalist Rating of Bronze and is one of the largest London-listed ETFs that tracks emerging markets.
On average, the Morningstar Category global emerging markets equity, which represents an average of corresponding open-end funds and ETFs, has increased 22% year to date.
The chart below shows the relative performance over 10 years of MSCI Emerging Markets against MSCI World, which only tracks developed markets stocks and has a 72% weighting to the US. The returns in GBP are lower this year because of the pound’s appreciation against the US dollar.
In sterling terms, the most recent standout year for EM was in 2016, when the index rose 32.63%; in dollars, that was in 2017, when the index gained 37.28%.
While the AI trade has lifted EM stock strategies, it has also led to a growing concentration risk in key benchmarks, just as it has within the US stock market. The five biggest EM stocks account for a quarter of the index, whereas in the US, the five largest stocks account for 30%.
That risk has played out in recent weeks as some of the wind has come out of the AI trade’s sails. Since the start of November, for example, Taiwan Semiconductor has fallen 4% and the Xtrackers MSCI EM ETF has dropped 2% (as of Nov. 20).
Tech Stocks Driving Emerging Market Index Gains
The biggest contributors this year to the Xtrackers MSCI Emerging Markets ETF were Taiwan’s TSMC, up 33% in GBP; and Chinese stocks Tencent 00700, which rose 42%, and Alibaba 09988, up 80%. TSMC is building custom chips for ChatGPT owner OpenAI, while Chinese consumer brands Tencent and Alibaba are developing their own large language models to interact with users.
TSMC, Alibaba and Tencent stocks are the three biggest constituents in the MSCI EM index: TSMC is listed in Taiwan and Tencent and Alibaba are listed in Hong Kong.
South Korea’s Samsung Electronics 005930 and SK Hynix 000660 are the fourth and fifth biggest constituents.
South Korean and Taiwan Stocks Dominate Gains
Among the top performers in the EM index overall, South Korean and Taiwanese stocks dominate.
In late October, Korean stocks were lifted by news that the South Korean government had agreed to buy 260,000 chips from Nvidia.
Noting the positive share price impact on Samsung Electronics and SK Hynix from the deal, Morningstar’s Jing Jie Yu kept the fair value estimates unchanged for both stocks.
“We recognize AI’s potential to drive long-term savings in other areas, such as overall supply chain optimization and predictive maintenance. However, we think that plenty must go right as it is difficult to integrate AI models into these complex networks to materially realize these efficiencies,” he says.
South Korea’s SK Hynix, a semiconductor manufacturer and the fifth biggest constituent, has grown 217% year to date. Korea’s Samsung Electronics, the maker of the Samsung Galaxy smartphone, has risen 79%.
In Taiwan, data center company Delta Electronics 2308, the 16th largest index stock, has increased 113% and outperformed many larger constituents to become the sixth biggest contributor to the index growth.
AI Trade Concentration Risk in Emerging Market Funds
While emerging markets have outpaced their developed markets’ rivals in 2025, passive investors face similar issues with concentration. The top five stocks in the EM index represent nearly 27% of the entire index, whereas the top five stocks in the S&P 500, including two Alphabet share classes, make up just under 30% of the index.
TSMC is now the biggest weighting in the emerging markets index, with a gain of nearly 200% over the last five years. Over just two years, the stock has gone from a weighting of 6% to nearly 12%, while second place Tencent has increased from a weighting of 4% to 5% in that period.
China Stock Market Overcomes the Tariff Turmoil
Lena Tsymbaluk, associate director for equity strategies at Morningstar, says 2025 has been a year where investors who were bullish on China have been rewarded.
After the tariff shock in April and talk of a trade war, Tsymbaluk says that emerging market investor sentiment has been helped by improving relations between the US and China.
“The agreement of a tariff framework between the US and China played a key role in restoring investor confidence in China and emerging markets more broadly. This optimism was further supported by a weaker US dollar and a continued shift away from the narrative of US exceptionalism, prompting investors to reallocate capital to other regions,” she says.
Chetan Sehgal, portfolio manager of Templeton Emerging Markets Investment Trust TEM, says that the AI theme has helped emerging market investors overcome their fears over tariffs, which in April looked set to fall hard on Asian countries.
“Trade policy uncertainties are fading, and emerging markets have taken a more conciliatory approach, seeking trade diversification while limiting the fallout from tariffs. The anticipation of tariff-related economic slowdown has collided with fast developments in AI,” he says.
Will Emerging Market Stocks Outperform Again in 2026?
Morningstar’s Global Investment Outlook report for 2026 notes the success of EM in 2025, helped by the shift away from US equities.
“Emerging markets have seen a resurgence this year as investors diversified away from more expensively priced developed markets, especially US equities,” say Morningstar South Africa’s Michael Dodd and Sean Neethling. They expect broad emerging-market exposure to continue to deliver positive returns for investors in 2026 despite wider global market uncertainty.
While China, Korea and Taiwan have been drivers of emerging markets index performance this year, the authors say that China remains unloved by investors despite the pivot to EM seen in 2025.
“Index heavyweight China accounts for around 30% of the index and has been a strong performer over the past year. However, while aggregate flows into broad emerging-market funds have increased in 2025, net flows into China equity funds have decreased. Investors appear to prefer broader emerging-market exposure,” they say.
Meanwhile, Fidelity International’s 2026 investment outlook also finds opportunities within emerging markets, a central conviction for the next year, and in artificial intelligence.
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, says: “Equities in places like South Korea and South Africa are re-rating higher, with improving fundamentals and attractive valuations relative to the rest of the world. China looks compelling for 2026 too with its ongoing policy support creating specific opportunities.”
He says the AI story is clear: “We are looking to take advantage across all parts of the AI value chain, remaining invested in the hyperscalers and chip manufacturers, but also finding value among those underlying, cheaper beneficiaries that are just starting to catch up.”
