Investment Prospects in Emerging Market Equities: Q1 2026
Jakarta — Entering the first quarter of 2026, a significant shift has occurred in the global investment landscape, a phenomenon rarely witnessed in the past decade. After a ten-year dominance by US technology stock success stories, early 2026 marks the resurgence of Emerging Markets (EM), previously overlooked by investors.
Emerging Markets comprise countries with characteristics of developed markets but which do not fully meet those standards, including China, India, Indonesia, and Brazil.
Emerging market equities have now become the primary magnet for investors seeking alpha, rather than merely serving as portfolio supplements. Driven by global tailwinds such as a weakening US dollar, surging commodity prices, and still-attractive valuations, EM offers a powerful growth engine, particularly amid signs of saturation in developed markets.
2025 Review: EM Equities Outperform S&P 500
Many observers had previously expressed scepticism. Market sentiment was shadowed by concerns about tariff threats from the Trump administration and worries about slowing consumption in China. However, market reality proved different.
Emerging Markets demonstrated remarkable resilience, recording a significant 33.6% gain. This far exceeded the S&P 500’s 17% growth and MSCI World’s 21% performance. This represents EM’s best relative performance against developed markets since 2017. What changed?
The “King Dollar” Thesis Cracks: Investors began seeking hedges outside US assets amidst concerns about deficits and inflation.
AI Revolution in the East: The public was reminded that the backbone of artificial intelligence (AI) infrastructure lies in Asia. China, South Korea, and Taiwan have proven their position as key players in global AI infrastructure.
Solid Earnings Growth (EPS): Earnings per share of emerging market companies grew surprisingly by 16% in 2025 and are projected to surge beyond 20% in 2026.
Entering Q1 2026, the major investment theme will shift from “US Growth” to “EM Growth & Value”. With capital flows predicted to dominate commodity and real asset sectors, Indonesian retail investors can purchase the Vanguard Emerging Markets Stock Index Fund ETF (VWO).
Why Are EM Equities Highly Attractive in Q1 2026?
- US Dollar Revaluation: The “Sell America” Narrative Begins
Historically, the US dollar is currently trading at elevated levels. In early 2026, we are witnessing a major reallocation phenomenon out of US assets.
This dollar selling automatically depresses the USD exchange rate, a blessing for emerging markets. When the dollar weakens, a positive domino effect occurs for EM:
-Search for Yield: US asset yields become less competitive, forcing global investment managers to seek higher returns in far more discounted EM valuations.
-Reduced Debt Burden: Many emerging markets carry debt denominated in dollars. USD weakness directly reduces debt repayment burdens and strengthens these countries’ fiscal positions.
-Monetary Policy Space: Downward pressure on import inflation occurs as local currencies strengthen against the dollar. This provides room for central banks in emerging markets (such as Bank Indonesia) to maintain accommodative interest rates or even reduce them to stimulate domestic growth.
- Inverse Relationship Between Dollar and Commodities
One fundamental principle of financial markets is the negative correlation between the dollar and commodities. Since most commodities are priced in USD, a weaker dollar makes energy, metals, and food cheaper for global buyers, boosting demand.
For countries such as Brazil, Indonesia, and Chile, which are major commodity exporters, this improves terms of trade and strengthens their current accounts. Corporate revenues in mining and agriculture sectors are assured to increase sharply.
- Profitability Convergence: Catching Up with the US
For years, investors avoided EM because profitability was considered far inferior to US corporate giants. However, Q1 2026 data shows profit convergence occurring.
Analyst consensus estimates EM earnings-per-share (EPS) growth this year at 21%, far exceeding the US (15%) and other developed markets (13%). Asia’s technology sector is now not only discussing innovation but also capital efficiency capable of matching global Return on Equity (ROE).
If this trend continues, we are witnessing the beginning of a new long-term strength cycle.
Market Conditions: Ownership Still Low (Underweight)
Despite the major rally throughout 2025, the majority of global institutional investors remain in an underweight position, holding EM equities below their ideal portfolio weighting.
Strategic Insight: There remains a substantial pool of “new money” that has yet to enter the EM market. When institutions begin rebalancing to neutralise their positions, demand for EM equities will surge, driving prices higher.
According to Jason Gozali, Head of Research at Pluang, EM market liquidity is also driven by the resurgence of retail investors. Although retail participation tends to have shorter time horizons and is often reactive to news (frequently resulting in panic selling or euphoria buying), they provide the trading volume necessary to keep markets dynamic.
For savvy investors, the volatility created by retail traders presents opportunities for active rotation strategies and thematic investing.
The Renaissance of Gold and Commodity Sectors
Entering 2026, a “Reversion to the Mean” is occurring. Real assets are beginning to outperform financial assets.
Copper: A key driver due to massive investments in AI data centres and electrical infrastructure, with supply constraints ensuring sustained price support in the medium term.