In a year when US tech stocks made the running, emerging markets (EMs) again underperformed their developed counterparts. But some green shoots are starting to sprout. The benchmark MSCI EM index was up 8% for the year to mid-December – underwhelming compared with the near-19% gain for the equivalent developed-markets index, but the performance gap is smaller than 2023, and much better than the 22% plunge during 2022.
Why have emerging markets underperformed?
India, the second-largest component of the EM index, also had another solid year. The BSE Sensex is up 9.5%, although with valuations stretched, global investors have become wary in recent months.
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How the AI revolution impacted emerging markets
As they are heavily weighted towards Asia, emerging markets offer more exposure to technology trends than is often appreciated. Nowhere is this more the case than in Taiwan, this year’s best-performing major EM. The local Taiex index has soared 28% and is up 62% since the start of 2023. The reason? AI mania, which has fuelled demand for Taiwan’s semiconductor manufacturing wizardry. A diversified bet this is not – chip giant TSMC alone now accounts for more than half of the MSCI Taiwan index.
A more surprising AI winner has been Malaysia, where the KLCI index has rallied 10% in 2024. US tech giants have been pouring billions of dollars of investments into cloud and AI facilities in the country, says Patrick Lee for Al Jazeera. After a “lost decade”, Malaysia is enjoying “a moment in the sun”.
The AI story has been very uneven, with only a few companies and countries capturing most of the gains. Thanks to Samsung, South Korea is an important node in the global chip industry, but it’s evidently not the kind of expertise that AI investors currently want. Add in a failed coup attempt and the Korean Kospi is off 8.5%.
Elsewhere in emerging Asia, fortunes have been mixed. Thailand’s SET has endured another dull year, with a 2.5% fall, while the Philippines’ PSEi has been flat. Indonesia’s IDX composite has dropped 4.5% amid signs of softening growth Vietnam’s VN-index enjoyed an 11% gain, but the country is not in many EM trackers because it is still usually classified as a frontier rather than an emerging market.
Political risks rise
It has been a bad year for Latin America’s leading markets as left-leaning presidents frighten away investors. Brazil’s Ibovespa has lost 8% as markets gradually lost trust in president Lula’s ability to keep spending under control. The real currency has lost a fifth against the dollar this year. Bloomberg said that traders in the country are entering “panic” mode. Meanwhile, Mexico’s IPC index is down 12%. The country looks likely to be one of the worst affected by Donald Trump’s tariff plans. But copper champion Chile’s IPSA is up 4%. Among other commodity plays, South Africa’s JSE Top40 has gained 7.5%, while Saudi Arabia’s Tadawul is flat.
Finally, emerging Europe has enjoyed a solid year. Poland’s WIG20 slipped 3.5%, but the Athens ASE index is up another 12% as Greece’s recovery gathers pace. Most impressively, the Czech PX has surged 24%. The Prague market stagnated through the 2010s, but has been enjoying a strong run over the past two years to reach 16-year highs. “Betting that the last shall be first” is “far from a foolproof investing strategy”, says Spencer Jakab in The Wall Street Journal. But “when it comes to beaten-down” EMs, “buying what feels uncomfortable” can sometimes pay off handsomely.
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