The Narrowest Rally in Emerging Markets

The Narrowest Rally in Emerging Markets

When 80% of a market gets ignored, Pay Attention.

Much has been written about the concentration of returns in US markets — a handful of AI-linked names carrying the index while the rest quietly lags. Less discussed is that the same thing is happening in Emerging Markets. According to Schroders, only about 20% of stocks in the MSCI Emerging Markets Index have outperformed the benchmark so far this year. An analysis of EM breadth data going back to 2000 by William Blair confirms this is close to the narrowest reading in over two decades.

 

The driver is familiar. As capital rushed toward AI beneficiaries, it concentrated in a small number of large technology companies. TSMC alone now accounts for roughly 14% of the MSCI EM Index. Add Samsung and SK Hynix, and a significant share of EM’s headline returns traces back to just three names. Taiwan and Korea’s index weights have risen sharply. India’s has fallen — from nearly 20% in late 2024 to around 12% today.

That decline is not a reflection of India’s fundamentals. It reflects the extraordinary gravitational pull of a narrow AI trade.

The more important question is what comes next.

History offers a useful precedent. When the dotcom rally peaked in 2000, a period of extreme concentration in a handful of technology stocks, the subsequent years saw leadership rotate dramatically. Markets and sectors that had been ignored during the tech run outperformed sharply as capital broadened out.

Emerging Markets today are being driven by a very small group of stocks. Whether leadership remains concentrated or begins to broaden could be an important theme to watch in FY2027. If market breadth does improve, some of the markets that have been overshadowed by the AI trade could find themselves back in focus.

The AI trade has been remarkable. But markets that ignore 80% of their constituents rarely stay that way for long.

 

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