Ugly Month in Emerging Markets May Be a Taste of What’s Ahead

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(Bloomberg) — Investors’ hopes of a stellar year in emerging markets are being tested by a bruising July that may offer a taste of the headwinds ahead.

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While stocks bounced sharply on Friday, a deep skepticism remains among investors over the enormous sums being pumped into the artificial intelligence buildout. Those fears are whipsawing the chipmaking hubs of South Korea and Taiwan, these markets comprise about 45% of MSCI’s emerging equity index, leaving the whole complex hostage to swings in a handful of semiconductor stocks.

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A fresh dose of that turbulence came on Friday as the Kospi benchmark surged a record 18%, after tumbling by almost the same amount in the previous three days. As chip heavyweights SK Hynix Inc. and Samsung Electronics Co. rallied by as much as a third, the MSCI index notched its best day since 2008.

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Yet the AI-led swings are compounding broader macro pressures. Oil prices jumped by a fifth in July as the Middle East war flared up again. At the same time, investors face the prospect of higher US interest rates as doubts emerge over the Federal Reserve’s commitment to battling inflation. 

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Taken together, it’s an “ugly backdrop” for emerging markets, according to Roger Mark, an emerging markets analyst at Ninety One Asset Management. He’s concerned the blockade of the Strait of Hormuz shows no sign of ending as the US-Iran war starts to spread across the Middle East.

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“There are lots of unknowns and you can paint a picture where things get uglier quite easily,” Mark said. “But from an EM perspective, the main risk is on the energy side: what happens if the energy flows don’t resume and what that means for inflation and central bank behaviour.” 

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Veteran market strategist Ed Yardeni recently downgraded his emerging-stocks stance to marketweight. “Four separate short-term headwinds are converging at once” he said, naming oil prices, a hawkish Fed, dollar strength and AI fatigue.

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Read: Korean Stocks Surge Record 18% as Tumultuous Week Ends on a High

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After Friday’s rebound, MSCI’s emerging equity index is about 18% higher on the year. That’s well below the 28% gain notched between January and June, but still more than double the S&P 500’s advance in 2026.

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Some investors such as Chandan Khanna, a portfolio manager at William Blair Investment Management, see the recent AI selloff as an opportunity. 

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“We’ve just had an air pocket in terms of normalization partly because of retail leverage coming off, which long term perspective is quite healthy,” Khanna said. 

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Many investors will remain cautious. Friday’s bounce is attributed to raft of regulatory measures and signs leveraged exchange-traded fund bets — which exacerbated previous declines — have run their course. While foreign investors bought $5 billion of Korean stocks, locals continued selling, offloading a record $5.8 billion worth of shares.