It’s a good time to be an emerging markets (EMs) investor. The MSCI Emerging Markets Index is up almost 25% year to date, outperforming U.S. equities for the second year in a row.  While this looks like the long-anticipated resurgence of EMs, it pays to take a second look.

The index performance is driven almost entirely by the AI trade. Information technology (IT) accounts for more than 40% of the MSCI Emerging Markets Index, with three mega-cap stocks in Taiwan and South Korea (TSMC, Samsung Electronics and SK Hynix) accounting for more than a quarter of the index. This leaves EMs more concentrated than the U.S., Europe or Japan.

Excluding these three names, broad EMs have barely moved, leaving a historically large gap between the cap-weighted and equal-weighted indices.

Implications for Global Allocators are Underappreciated

The market’s AI tilt matters most for institutional investors (including pensions, endowments and sovereign funds) that have long relied on EMs for diversification. A market-cap-weighted basket of EMs used to deliver exposure to different currencies, policy cycles and growth models. Today it behaves less like a diversified portfolio and more like a single-themed macro bet on AI—tied to the same chip cycles, capex swings and hyperscaler earnings that drive tech markets everywhere else.

Although this highly concentrated, AI-themed return profile may work for passive investors in the short run, it doesn’t serve the diversification needs of large asset allocators (see Goel and Apoian, 2026).

More importantly, it obscures where the real opportunities in EMs now sit.

Diversity is the Opportunity

Digging deeper, EMs generally reward those looking for a diversified set of economic drivers. EM Asia is disproportionately tilted toward the technology sector. Latin America offers among the highest exposure to commodities including copper in Chile, oil in Brazil and precious metals in Peru. EM Europe is led by financials, giving investors a leveraged play on credit growth dynamics as well as a large consumer base. And lastly, EM Middle East & Africa blends commodities and financials, tied to the infrastructure cycle and energy security—both of which are critical in this new geopolitical world.

This heterogeneity is precisely what a diversified allocation is meant to deliver to investors, and what a single cap-weighted benchmark lacks—especially at this stage of the cycle.

Policy Reforms Can Turn Structural Potential Into Performance

It’s long been evident that EMs provide structural advantages including favorable demographics, a rapidly expanding middle class, rising urbanization, and gradual convergence toward developed-market income levels. What’s new is that EMs are increasingly positioned to capitalize on these strengths and exercise real geopolitical leverage. For example:

• Many EMs have leapfrogged the developed world in native technology and payments, with digital payment systems like India’s UPI and Brazil’s Pix unlocking a meaningful productivity boost
• Being mineral-rich is no longer merely a commodity-cycle story: it has become a source of geopolitical leverage as supply-chain security and the energy transition intensify competition for critical inputs
• As the multilateral trade system weakens and the World Trade Organization loses relevance, EMs are striking bilateral and regional deals to their advantage, ranging from Vietnam and India in Asia, to the Gulf states, to Latin American economies through the Mercosur accord with Europe

Ways to Gain Exposure

Investors can make the most of these structural tailwinds by focusing on three concrete, investable drivers that the MSCI Emerging Markets Index misses.

1. Policy-driven reforms: productivity and valuation re-rating

In several markets, economic growth is boosted by real policy reforms implemented over years, not just external demand. In many cases, these reforms are the result of democratic elections where voters supported orthodox policy measures. The catalysts, leading to market-friendly repricing opportunities, range from the pro-business shift in Latin America to a regime change in Hungary.

One clear example is Chile, where a pro-growth reform agenda—including corporate tax adjustments, housing incentives, and faster permitting—is underway, with the potential to lift trend growth meaningfully.

2. Quality assets at discounted valuations

With the global AI-driven technology boom in full swing, stocks that have historically been the strongest outperformers are now out of favor. This is evident in the historic underperformance of the “quality” factor relative to the “momentum” factor over the past 12 months.

These undervalued quality stocks offer a unique opportunity: a cheap hedge in case the AI boom turns into a bust, and a steady performance compounder with a margin of safety even if it doesn’t.

3. Credit and carry without concentration risk

EM corporate credit offers a different way to gain exposure to the EM asset class, one that avoids the equity market’s heavy concentration in AI and technology.

Yields in several markets including Brazil and Mexico remain attractive, even after the recent spread tightening. Returns are driven by carry—that is, the interest spread between the yield on EM debt and the cost of funding in a low-interest currency—and credit fundamentals rather than dependence on a single global growth theme.

Diversification Has to Be Built, Not Assumed

Rethinking exposure to EMs does not require taking a negative view on the AI trade or the companies leading its current technological cycle. Taiwan and Korea can continue to perform well on their own fundamentals. But it does change how EM exposure should be constructed and the portfolio designed.

Using benchmark EM indexes as a default asset allocation results in concentrated risk while missing EM-specific opportunities. The implication for investors is clear: if they want to achieve true diversification across sectors and geographies, EMs can play an important role. But that portfolio should be designed in a more bespoke way to embed more intentional exposure to EM-specific strengths. The diversification benefits are still there, but they must be built, not assumed.

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