Emerging market equities surged to unprecedented levels this week, shrugging off the largest energy supply disruption in years as investor enthusiasm around artificial intelligence and resilient corporate earnings propelled a remarkable recovery from a sharp March selloff.
A V-Shaped Recovery
Both the MSCI Emerging Markets Index and the MSCI Asia ex-Japan Index climbed roughly 3% on Wednesday to reach fresh record highs, putting them more than 20% above their March 31 lows. The rally marks a dramatic reversal from what the Institute of International Finance described as the largest EM equity outflow in over 20 years, triggered when Middle East tensions erupted in late February.
The MSCI Emerging Markets Index has now gained approximately 14-16% year-to-date, more than tripling the S&P 500’s roughly 5% advance over the same period. Taiwan and South Korea’s stock markets have been the standouts, surging 30% and 45% respectively over the past six weeks as semiconductor firms race to supply AI hyperscalers with chips.
Bond Markets Signal Confidence
Credit markets have echoed the equity rally. JPMorgan’s CEMBI Index yield spread against Treasuries narrowed to 205 basis points on Tuesday — the tightest since August 2007. The sovereign EMBI spread has also returned to pre-conflict levels, approaching its narrowest since 2013.
The recovery in both equities and credit has occurred despite Brent crude prices rising above $114 a barrel and the U.S. naval blockade of Iran being extended indefinitely. Citi economists noted that EM inflation excluding China stands at 3.5%, higher than a year ago but well below the 2022 peak of 8%.
AI Boom Drives Complacency — or Conviction
JPMorgan’s cross-asset strategy team has maintained a bullish stance on risk assets, preferring “Quality Growth and the AI upstream themes” as key equity market drivers. The message from Q1 earnings has been broadly positive, with analysts revising profit forecasts for emerging-market companies upward by approximately 30% in 2026, compared to just 10% for U.S. equivalents.
Yet questions linger about how long the rally can persist. According to Reuters, the IMF warned that a worsening Middle East scenario would hit emerging economies nearly twice as hard as advanced ones. Goldman Sachs’s EM financial conditions index tightened by 100 basis points in March before easing, and currencies including India’s rupee, Indonesia’s rupiah, and the Philippine peso have slumped to new lows. HSBC economists expect global food prices to rise 20% in coming months, a factor that weighs disproportionately on EM consumers.
“It’s a delicate dance,” Reuters columnist Jamie McGeever wrote. “It could be dangerous as well.”
