The countries beneath the index

Emerging markets offer some of the most dynamic and attractive opportunities in global equities. After more than fifteen years of underperformance relative to developed markets, driven by a strong US dollar, weaker earnings growth and corporate governance concerns, the opportunity set looks fundamentally different today.

Structural reform, improving corporate quality and rapid technological advancement have reshaped the investable universe. What was once a benchmark heavily influenced by commodities and mining is increasingly driven by technology and innovation. At the same time, the index has become extremely concentrated, with a handful of large artificial intelligence (AI) beneficiaries accounting for an outsized share of returns. Emerging markets remain defined by exceptional divergence in performance between underlying countries. That divergence is what makes the asset class such fertile ground for active management.

Massive divergence creates opportunity

Emerging markets present a highly favourable environment for active investing, driven by significant performance dispersion across countries. In any given year, the gap between the best and worst performing markets frequently exceeds 50%. In 2025, for example, India delivered a flat return while South Korea returned almost 100%. These outcomes reflect differing reform cycles, interest rate environments, AI exposure and domestic economic developments, and are a key reason why emerging markets have historically rewarded active investors.

Getting country allocation right is critical. Political uncertainty and macroeconomic volatility often create attractive entry points, while policy progress and reform can act as powerful catalysts for returns. The ability to allocate capital towards markets entering favourable cycles, while reducing exposure to those facing near-term challenges, remains one of the clearest advantages in emerging market investing.

Graph 1: Total USD returns in key emerging markets

Source: Fairtree, Bloomberg, as at the end of December 2025.

South Korea and Taiwan lead the AI trade

Over the 12-month period to June 2026, South Korea and Taiwan have been the standout performers across emerging markets, driven by intense demand for memory, foundry and semiconductor companies as investors have sought exposure to the build-out of AI infrastructure. In South Korea, Samsung Electronics and SK Hynix have benefited from a tight high-bandwidth memory supply and strong AI-related demand. In Taiwan, TSMC has continued to gain from demand for leading-edge chips and advanced foundry capacity. The resulting market performance has been extraordinary, with South Korea rising more than 210% and Taiwan more than 100% in US dollars over the 12-month period.

India and China, by contrast, have faced a very different set of challenges. India, as one of the world’s largest energy importers, remains sensitive to higher oil prices, while elevated valuations have also weighed on investor sentiment. China has continued to grapple with a prolonged property market downturn and intense competition across parts of the internet sector, contributing to weaker earnings expectations and more subdued market performance.

The contrast highlights one of the defining characteristics of emerging markets. While some countries have been major beneficiaries of the AI investment cycle, others have been shaped by domestic economic and policy developments, creating substantial divergence in returns across the asset class.

Graph 2: Share price performance across emerging market countries in US dollars (%)

Source: Fairtree, Bloomberg, as at July 2026.

A reshaped index

The strength of South Korea and Taiwan reflects a broader structural shift in the composition of the emerging market index. The traditional view of emerging markets as a commodity-driven, capital-intensive asset class no longer holds. Over the past two decades, the benchmark has transformed, moving away from mining and commodities towards technology, e-commerce and services.

This transformation is most evident at the country level. The commodity exporters that once dominated the index – Brazil, South Africa and Russia – have declined to low single-digit weights. As their influence has diminished, so too has the benchmark’s exposure to sectors such as energy, materials and telecommunications.

In their place, East Asia has become increasingly dominant. Taiwan, home to many of the world’s leading semiconductor companies, has grown from around 14% in 2022 to approximately 27% today. South Korea now accounts for a further 24%, meaning the two countries together represent almost half of the benchmark. China, by contrast, has declined from a peak weight of around 40% in 2020 to roughly 19% today, while India accounts for around 11%.

The result is an index that is far less dependent on commodity cycles and increasingly exposed to globally competitive, innovation-led industries such as semiconductors, e-commerce and fintech. These businesses generally offer stronger long-term earnings growth, higher returns on capital and better free cash flow generation than the sectors that once dominated the benchmark.

Graph 3: MSCI Emerging Markets country composition over time

Source: Fairtree, Bloomberg as at July 2026.

A concentrated market

That transformation has a flip side: the index is now exceptionally concentrated, with just 18% of companies in the index currently outperforming it, the lowest reading in more than two decades and a clear indication of how few stocks are driving returns. Much of that strength has come from just three companies: Samsung, SK Hynix and TSMC. Samsung and SK Hynix together account for approximately 70% of the MSCI Korea Index and more than 16% of the MSCI Emerging Markets Index, while TSMC represents around 55% of the MSCI Taiwan Index and more than 15% of the MSCI Emerging Markets Index.

We believe emerging markets are well-positioned for the years ahead. While returns are currently being driven by a small number of companies linked to the AI investment cycle, market leadership rarely remains static. As conditions evolve, new opportunities are likely to emerge across countries, sectors and companies. Combined with an improving macro backdrop and a transformed benchmark, we believe the asset class remains well placed to deliver attractive long-term returns.

Author

Karena Naidu

Karena joined Fairtree in 2024 as a Global Investment Specialist in the Investment team. She began her investment career in 2019 as an Investment Professional at Investec Asset Management, followed by a role as an equity analyst at Denker Capital. In 2021, she joined PSG Asset Management as an equity analyst, gaining further experience in equity markets and financial modelling. Karena holds a Bachelor of Science degree in Mathematical Sciences from the University of Johannesburg.