Emerging-market (EM) equities are likely to deliver slower returns next year after an expected period of early outperformance, but investors should stay overweight on Chinese stocks thanks to attractive valuations, solid fund flows and favourable macro catalysts, according to UBS.
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After growth of about 18 per cent in earnings per share (EPS) in 2025, the companies in the MSCI Emerging Markets Index would deliver earnings growth of 15 per cent in 2026 and 10 per cent in 2027, with artificial intelligence “playing a significant role”, said Sunil Tirumalai, head of EM and Asia equity strategy at UBS Global Research, in a report this week.
The Swiss investment bank said EM markets still offered multiple opportunities, supported by a “normalising” macro environment in 2026. This included a rebound in global growth, visible fiscal support in developed markets and Federal Reserve balance-sheet expansion, which is expected to keep long-end US yields in check, easing some of the yield headwinds for emerging-market equities, according to UBS.
AI remained a key driver of EM performance and would stay healthy given solid cash flows, low leverage among big spenders and relatively attractive valuations, UBS said. It added that about 23 per cent of the MSCI EM index comprised companies with direct revenue exposure to AI demand, but these names accounted for more than 42 per cent of 2025 returns and drove almost all of the EPS upgrades this year.
These companies’ earnings growth was expected to remain above 20 per cent in 2026 before normalising in 2027, according to the bank. UBS preferred Chinese consumer-facing AI names over Korean and Taiwanese peers, given more reasonable valuations and less aggressive re-rating.
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The bank reiterated its overweight stance on China versus India, citing supportive signs such as easing tariff risks and growing AI revenue.