The next phase of EM: AI, resilience and selective opportunities

Asian and EM equities outperformed global equities in August, while the US dollar softened modestly. Growth remained resilient, supported by a broadening manufacturing cycle and continued AI-related investment. However, persistent inflation and the prospect of further US monetary tightening kept pressure on bond yields. Higher oil prices added to inflation concerns and reduced the diversification benefit of duration, leaving energy-importing Asian economies particularly exposed.

Chinese equities regained momentum during the month, with onshore markets outperforming offshore equities as smaller-cap, technology and AI-related themes strengthened. China bonds and credit remained resilient, providing diversification amid a mixed economic backdrop: new data showed continued softness in domestic demand and investment in July, although exports and high-technology manufacturing continued to provide areas of resilience despite softer industrial activity.

Outlook and key risks

We remain constructive on EM and Asian risk assets, supported by resilient earnings and improving manufacturing and export momentum, but favor selective exposure over a broad increase in market beta. In North Asia, technology demand and earnings remain supportive, particularly in Taiwan and South Korea, although elevated volatility warrants a disciplined approach to risk-taking.

We remain mindful of valuation, positioning and liquidity risks, particularly after strong performance in parts of the technology supply chain. This argues for diversified exposure, disciplined profit-taking and a focus on areas where fundamentals, liquidity and portfolio contribution remain aligned. Key risks include renewed oil or geopolitical shocks, a stronger US dollar and a sharper reversal in AI-related positioning.

Within China, the domestic recovery remains uneven and performance dispersion across sectors is wide. In our view, a more targeted approach to AI supply-chain beneficiaries may offer a more attractive risk-reward profile than broad technology exposure.. We continue to complement our growth positions with effective diversifiers across sectors, regions and asset classes to strengthen portfolio resilience in a volatile market.

EM equities rebounded 3.2% in USD terms in August, outperforming both developed markets and the US as the AI-led rally resumed across North Asia. Strong earnings, sustained AI infrastructure spending and upbeat semiconductor guidance boosted sentiment, with South Korea and Taiwan driving the rebound.

Across regions, EM Asia led performance, while Latin America underperformed due to weakness in Brazil. South Africa was the top-performing market and the Philippines the weakest. At the sector level, materials was the top performer, supported by gains in gold and copper prices, followed by health care.

Among the best-performing companies in August were South Africa’s AngloGold Ashanti, which gained on from strength in gold prices, and Taiwan’s MediaTek, which benefitted from continued demand across the AI and semiconductor ecosystem.

EM equities had recorded their strongest performance since 2009 in the second quarter, returning 23.3% in US dollar terms over the three months. This was supported by a resurgence in global risk appetite following the initial impact of the US-Iran conflict, as well as ongoing enthusiasm around the AI trade.

Concerns around fiscal and monetary policy in the US as well further weakness in the dollar supported EM bond performance in August. Speculation around a possible September increase in interest rates from the Federal Reserve helped drive US Treasury yields towards recent highs – despite the US government’s announcement of a bond buyback program.

EM sovereign debt, as measured by JP Morgan's EMBI Global Diversified Index, was up 0.89% over the month of August. By credit spectrum, high yield was up 1.06% and outperformed investment grade, which ended the month up 0.70%. On a year-to-date basis, EM sovereign debt is up 2.75% with high-grade down 0.19% and high-yield up 5.58%.
EM corporate debt, as measured by the CEMBI Diversified Index, was up 0.62% over the month. By credit spectrum, high yield was up 0.81% and outperformed investment grade, which ended the month up 0.48%. On a year-to-date basis, EM corporate debt is up 2.22% with high-grade up 0.66% and high-yield up 4.39%.

Key developments in bond markets

In Colombia, new president Abelardo de la Espriella took office in early August, pledging roughly USD 6 billion in spending cuts. However, following a 7.4-magnitude earthquake on August 10 that has reconstruction costs estimated at about USD 10 billion, the fiscal outlook remains highly uncertain. The government is likely to maximize cheaper multilateral funding and reduce external bond issuance, which would support sovereign spread compression through lower supply.

Argentina’s EMBI spreads surged back above 500 basis points for the first time in three months as markets began pricing uncertainty around the 2027 presidential election and the durability of Milei's fiscal reform agenda and peso stabilization program. The outlook remains binary: sustained reform credibility could retighten spreads, but any signs of policy discontinuity could push spreads materially wider.

In Venezuela, the US plan to control more than 65 billion barrels of oil reserves sparked a rally in sovereign and PDVSA bonds on hopes of higher production and repayment capacity. Restructuring prospects remain unclear, however, given uncertainty around cash-flow allocation and disputed interim authority. Outcomes for legacy bondholders are likely to depend on whether Washington prioritizes reconstruction or creditor recovery.

Recent polls in Brazil point to a narrowing gap between Flávio Bolsonaro and Lula in a potential runoff, as allegations involving Lula’s son, "Lulinha," have begun to weigh on the president’s campaign. Meanwhile, recent data releases have pointed to a softening economic backdrop, with delinquency rates rising. Although headline GDP growth for the second quarter beat expectations, the composition was less favorable: the upside surprise was attributable largely to inventory accumulation, while household consumption fell.

Credit rating updates

Pakistan was upgraded to B3 by Moody's from Caa1, reflecting improved fiscal and external buffers under its IMF program. The upgrade was quickly monetized: Pakistan raised a record USD 3 billion in a dual-tranche bond sale (5yr at 7.75%, 10yr at 8.25%), attracting nearly USD 6 billion in orders.

Kazakhstan was upgraded to BBB by S&P, which cited economic resilience amid global uncertainty and volatile commodity prices.

Ecuador was upgraded to B from B- by S&P due to improved access to financing from international capital markets and official lenders.

Benin was upgraded to Ba3 from B1 by Moody’s, which cited years of strong fiscal performance under an IMF program, GDP growth of 8.1% in 2025 (the fastest rate since 1990) and sustained improvements in debt management.

EM debt outlook

EM fixed income remains attractively valued relative to some other fixed income sectors, which has supported crossover demand and inflows. Future flows may vary depending on market conditions. Index yields are near the top of their 15-year range, while hard currency EM sovereign and corporate debt indices have delivered high single-digit annualized returns over the past three years.¹ A stable or weaker US dollar could provide support for EM debt performance, a backdrop that has largely been absent over the last decade.

There are also several potential catalysts for further upside, including easing geopolitical tensions, ceasefire agreements and stabilization in China. In this environment, EM sovereign and corporate dollar-denominated debt may continue to benefit if current market conditions persist, although returns are uncertain and subject to changing economic and market conditions. Local-currency debt should also benefit over the long term, although periods of dollar strength could create short-term volatility.

China’s growth has remained resilient despite trade tensions, and commodity prices have stayed elevated even during slower growth periods. Supply constraints and demand linked to decarbonization are likely to keep commodity prices supported, benefiting EM commodity exporters, which account for more than 60% of the EM sovereign hard currency index.

Technical factors also remain supportive. US policy uncertainty has driven increased allocations to EM, with inflows reaching a four-year high in 2025 and a further USD 34 billion year-to-date in 2026.² At the same time, net issuance of EM external debt is expected to remain constrained which may be supportive for bond prices. Investors remain underweight the asset class, but growing global interest and inflows reflect improving investor engagement with the opportunity set.

¹ Source: JP Morgan and Bloomberg data.
² Source: JP Morgan and Bloomberg data.

Code: S-09/2026 M-007182