Multi-Asset Insights

Emerging markets: Beyond dollar luck

EM is no longer a single ‘risk‑on’ trade – it’s a heterogeneous opportunity set demanding selective consideration.

In 2025, the stars aligned for emerging markets and the asset class delivered stellar returns. Much of the credit for this performance has been given to a weaker US dollar but there is a great deal more happening under the hood. The EM story has evolved, with macro, valuation and thematic tailwinds of AI and commodities all now providing structural support for EM assets. Even with stronger structural tailwinds, performance is uneven across EM, making active, selective positioning critical.

EM performance is about fundamentals, not just luck

The performance of EM assets has long been intertwined with movements in the dollar. EM economies often issue debt in USD, so a weaker dollar makes servicing this debt in local currency cheaper. It also improves the competitiveness of EM exports, especially in commodities, which are key exports for many EM economies .

In 2025 and the start of 2026, the US dollar weakened as confidence in US economic policy and Federal Reserve independence eroded. As one would expect against this backdrop, the performance of EM assets was strong.

Figure 1: Weaker dollar (black) correlates with strong EM stocks (red)

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Source: Refinitiv, MSCI, HSBC Asset Management, February 2026.

The weaker US dollar was clearly a meaningful tailwind for emerging market performance, but it’s far from the only driver. EM economies have become more fundamentally sound, delivering trend GDP growth that has generally exceeded that of developed markets since the financial crisis, strengthening fiscal management and FX reserves, and enhancing central bank credibility. The latter is closely linked to the inflation backdrop in EM economies.

EM central banks were generally quicker than their DM counterparts to hike interest rates after the Covid pandemic, and many EM economies were able to get inflation back under control quicker than DM peers. Today, the inflation picture is broadly positive for most EM countries, with issues in China centred on a lack of inflation, in contrast to DM peers. There is still ample room for EM policy rates to fall: Latin American countries such as Brazil, Colombia and Mexico remain near the top of their five‑year ranges, as do many CEEMEA economies, whereas Asian rates tend to sit towards the lower end.

Improving fiscal positions have also reduced vulnerability to external shocks. EMs have lowered external debt to GDP ratios and reduced reliance on US dollar borrowing, diminishing the sensitivity of local bond yields to dollar strength and global risk off episodes. Current account positions have meanwhile shifted from widespread deficits in 2009–2010 towards narrower gaps or surpluses in several economies, including China and South Korea.

Figure 2: EM response to global risk-off shocks

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Source: IMF, HSBC Asset Management, October 2025.

EM at the heart of the AI boom

While EM countries have built resilience against further shocks, when looking at growth, there are two major themes that have dominated over the last year. These are artificial intelligence and commodities. That said, the benefits won’t accrue evenly across emerging markets and capturing them will depend on investing in the right countries, sectors and asset classes.

EM tech companies are at the centre of the global proliferation of AI and, similar to their US peers, they dominate their respective equity markets. In fact, the EM equity universe is more exposed to tech companies than the US, while stock concentration in major AI players is also greater.

Among these concentrated exposures are Taiwanese and Korean chipmakers. These companies are wholly integrated into the global AI supply chain and well placed to benefit from the surge in US hyperscaler capex. We also find EM AI hyperscalers, large companies at the heart of the AI trend that are building out AI networks, compute capabilities and storage at scale. China dominates the hyperscaler market in EM, but it is also focusing its efforts on AI independence versus the west, potentially offering some diversification in the space.

India is also an emerging AI player. Its large IT services sector highlights key vulnerabilities in India’s economy, with AI threatening to replace many of its business. However, the government is trying to pivot towards developing India as an AI hub by incentivising investment from US hyperscalers and hosting global summits. If India successfully rotates towards an AI‑hub model, we could see a growth rotation from white collar vulnerability to a hyperscaler capex beneficiary.

Building EM’s data centre backbone

One key opportunity for India’s AI transition, and EM more broadly, is in data centres. The data centre landscape in EM is relatively nascent – outside China, where it is more established – but things are changing. There is growing demand from US and Chinese hyperscalers to build data centres closer to large populations to reduce latency for end users, and governments such as India’s are offering incentives to attract this investment and boost growth.

China’s position in the data centre market is strengthened by its streamlined permitting system, which allows data centres to be built much faster than in the US and Europe. US export restrictions on high performance chips, which are vital for training AI models domestically, are an obstacle for Chinese hyperscalers but data centres in Southeast Asia provide a means for China to access these chips.

More broadly, ever increasing geopolitical tensions have seen many EM countries reevaluate their reliance on US tech, with China, India, and countries in the Middle East focusing on greater ownership of data and building out their own domestic infrastructure.

The biggest hurdle facing countries building out data centres is utility capacity. Outside China, power supply constraints have led governments such as Malaysia’s to impose limits on new data centre projects to safeguard grid stability around key urban areas. Over time, resolving these constraints could provide a meaningful growth impulse and create AI‑related tailwinds for local fixed income and FX markets.

AI adoption across EM

The adoption and monetisation of AI could offer further opportunities, but progress has been quite uneven across countries and sectors. Strong top-down policy support has enabled rapid AI adoption in the Middle East, while the lack of cloud infrastructure and homogeneous enterprise platforms present an obstacle in other EM regions. However, there are several uniquely EM solutions that could be adopted. For the consumer sector, EM countries – particularly China – have a strong history of building ‘super apps’ that blend multiple functionalities. These apps can combine personal and commercial data that could create new opportunities not seen in DM.

Health care and robotics both represent further opportunities. China’s health care infrastructure and data are relatively centralised and ripe for extensive AI deployment. The country, alongside Korea, is also an adopter of AI robotics to assist in blue collar work. However, many companies engaged in these activities remain privately owned, and while publicly listed opportunities exist, they remain limited compared to the size of the industry.

The EM AI investment landscape

From an asset allocation perspective, Korea and Taiwan are already recognised as deeply entrenched AI beneficiaries, but moves so far this year have highlighted how volatile these concentrated AI plays can be. China, meanwhile, spans multiple AI sub-themes and its pursuit of AI independence offers some diversification versus its narrower North Asian peers, though it would not be completely immune to downturn in US AI stocks.

Outside North Asia, AI is primarily a stock selection story, with limited near term feedthrough to country-level equity and bond indices. Over time, more opportunities are likely, but they depend on a favourable sequencing of AI employment disruption, global AI capex, domestic infrastructure build out, regulation, AI driven productivity improvements and macro conditions.

Metals at the core of EM   

Commodities are among the key exports for EM countries and are central to the investment case. The latest rally in commodity prices has been largely focused on metals, with both precious and industrial metals outperforming since last year, while agriculture and energy have been broadly flat outside the recent Middle East conflict.

Figure 3: EM response to global risk-off shocks

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Source: HSBC Asset Management, Bloomberg, March 2025.

The uptick in metal prices is not just due to the weaker dollar; there is evidence of a structural shift. We recently wrote about how gold is becoming a strategic asset rather than a purely tactical inflation hedge, with central banks now a key component of demand. Additionally, gold has a niche application in AI accelerator chips, which is a small but growing part of its demand.

Demand for industrial metals is also underpinned by long‑term structural themes such as urbanisation, electrification, energy storage systems, and AI and data centre build‑out. Rising geopolitical tensions and de‑globalisation have also ushered in an era of ‘resource nationalism’, with governments building up stocks of critical metals that are seen as essential to national security and industrial policy.

Supply scarcity is another important factor supporting higher prices. Much of the value of precious metals is derived from their scarcity, and the marked slowdown in discoveries of large‑scale gold reserves, as well as the depletion of easily accessible gold deposits, is likely to maintain tight supply.

Industrial metals are also witnessing supply tightness. Years of underinvestment, declining copper ore grades and much longer mine development timelines are limiting the ability of new supply to respond quickly to higher prices. Higher prices can help incentivise secondary scrap supply, but this potentially tightens the market further down the line. As a result, we have entered a new environment where higher prices no longer narrow the supply-demand gap.

Other factors are more policy led such as China’s anti-involution campaign, which has led to cancellations of lithium mining permits and a production cap for aluminium.

Several metals are now already in deficit territory, with balances still tightening. Many EM producers are positively exposed to this supply-demand imbalance. In Latin America, Chile is the world’s largest copper producer while Brazil has exposure to bauxite, which is used in aluminium production. Africa is a large producer of precious metals, while in Asia, China leads in rare earth metals and Indonesia in nickel production.

Accessing the metals story

Commodity-linked derivatives are often the first route that comes to mind when trying to gain exposure to commodities. But for many resources, this avenue isn’t always optimal. For example, there are currently no futures for rare earth metals, lithium is not in the Bloomberg Commodity Index, and even where futures exist (such as copper), they are not always the most liquid.

Equity metal‑linked exposure is therefore a potentially more efficient way for investors to access this theme. The EM metals and mining sector accounts for a larger share of the broader EM index than the equivalent DM sector. At the country level, South Africa stands out, with around 22 per cent of its equity index revenues coming from precious metals, while Poland, Greece and Mexico have the strongest listed links to copper.

Interestingly, there is a disconnect between where resources are mined and where equity revenue exposure sits. For example, Chile has no copper revenue exposure in its listed equity market, since Codelco – the largest copper miner in the world – is state‑owned. As a result, it is often appropriate to look at DM companies operating in EM countries to get the most direct exposure to the EM commodity theme.

Figure 4: DM listed diversified miners revenue split by geography

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Source: HSBC Asset Management, annual company reports. Data as of end 2025.

The limitations around EM equity exposure to commodities centre on idiosyncratic country risk and corporate governance concerns. Examples include cartel issues in Mexico and governance concerns in Indonesia, which saw it downgraded to frontier status. While there have been improvements in select EM equity markets, it will take time to bring EM to parity with DM standards. Risk management and position sizing become key when expressing this theme via EM.

Outside equities, currencies are arguably a more direct play on the commodity theme. Commodity-orientated currencies in Latin America and EMEA have outperformed during the recent commodity rally. These gains still look quite subdued if we compare against the improvement in terms of trade. More generally, there is potential for a virtuous cycle in these economies: improved trade balances support FX appreciation, which lowers imported inflation and creates room for rate cuts, which in turn supports growth and fiscal outlooks, attracting further inflows.

One way in which fixed income exposures can benefit is via higher metal prices increasing government revenue. This can be done through royalties, corporate taxes on mining profits, and export duties improving fiscal positions and reducing risk premia, which can benefit local bond markets. Countries with high mineral resource rents as a per cent of GDP include Chile, Brazil, South Africa and Indonesia.

Oil vulnerabilities and trade chokepoints

While metals provide a structural tailwind to many EM commodity exporters, oil vulnerability has come sharply into focus, especially for Asian importers. Korea, Taiwan and much of ASEAN (excluding Malaysia) are heavily dependent on imported oil and gas, and rely on political stability in the Middle East and frictionless maritime shipments.

For India and China, oil and gas imports represent a smaller share of GDP, and China’s overall energy mix is less reliant on oil, with heavy coal use gradually giving way to cleaner sources. However, both countries still face significant route dependency: roughly 80 per cent of China’s imported crude passes through the Strait of Malacca, and around 90 per cent of Japan and South Korea’s energy imports transit the same corridor, with Taiwan similarly reliant on seaborne flows.

Recent geopolitical flare‑ups have underlined how fragile these arteries can be. Iranian threats to the Strait of Hormuz, renewed piracy in the South China Sea and around the Strait of Malacca, the 2021 Suez Canal blockage and US efforts to exert greater influence over the Panama Canal all highlight the risk of sudden disruptions. For EM, this creates asymmetric downside for oil importing Asian markets in any prolonged supply shock. Bottom-up differentiation across EM becomes increasingly important.

A more resilient EM landscape, but granularity is key

EM’s appeal today rests on more than dollar weakness. Strong macro fundamentals, improved debt profiles and credible inflation frameworks have reduced vulnerability to risk‑off shocks, while policy rates in many markets remain well above pre‑Covid levels, leaving room to ease as inflation normalises. At the same time, valuations are still compelling: EM FX is heavily undervalued versus the dollar, real yields sit near the top of their 10‑year ranges in key markets, and EM equities trade at a sizeable discount to DM, despite strong earnings momentum in tech and commodity‑heavy indices.

These foundations are reinforced by structural themes. North Asia sits at the heart of the global AI supply chain, whilst China is pushing to establish itself as a self-reliant global leader in AI technology. The Middle East stands out for its rapid adoption of AI, whilst India is racing to attract data centre and AI hub investment. Thanks to these trends, metals‑exporting EMs in Latin America, Africa and Asia stand to benefit from a persistent supply-demand imbalance in critical minerals.

While EMs benefit from powerful structural tailwinds, improving fundamentals and attractive valuations, they represent a highly heterogeneous group of countries that cannot be treated as a single, binary ‘risk‑on/risk‑off’ bloc. This reinforces the case for a selective, active and fundamentals driven approach to the asset class.

Source: HSBC Asset Management, May 2026. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.