Emerging Markets Demonstrate Momentum Driven by AI and Policy Support

Global AI Demand Fuels Emerging Market Resurgence

Emerging markets (EM) have demonstrated significant positive momentum throughout 2025, driven by a confluence of factors including burgeoning global demand for artificial intelligence (AI) technologies, strategic domestic policy reforms, and favorable macroeconomic conditions. This rally marks nine consecutive months of gains for EM equities, with the MSCI Emerging Markets Index rising 7% in September alone, contributing to an anticipated 8% price return by year-end, as forecast by Goldman Sachs Research. The investment bank projects the index to reach 1,480 over the next 12 months, up from 1,373 as of October 9.

Technology Sector Leads Gains Amid Semiconductor Boom

The technology sector, particularly the semiconductor and memory chip industries, has been a primary beneficiary of the AI revolution. South Korea's KOSPI index soared 3% to a record high of 3,565.71 points, making it the best performer in Asian trade. This surge was underpinned by significant advancements from key players such as SK Hynix Inc. (KS:000660), which jumped 11% to a record high, and Samsung Electronics Co. Ltd. (KS:005930), which rallied 4.5% to a near six-year peak. These gains followed a preliminary agreement to supply chips to OpenAI and a collaboration to build data centers in South Korea for OpenAI’s Stargate project, a monumental $500 billion data center initiative in the United States. SK Hynix is already a pivotal supplier of advanced high-bandwidth memory chips to the AI industry, counting NVIDIA Corporation (NVDA) among its largest clients, a role Samsung is also now poised to fulfill.

Taiwan's Taiwan Semiconductor Manufacturing Company (TSMC) (TW:2330), a crucial manufacturing partner for the AI sector, saw its shares rise over 3% to a new record. Japanese semiconductor equipment manufacturers Advantest Corp. (TYO:6857) and Tokyo Electron Ltd. (TYO:8035) also advanced by 1.4% and 7%, respectively. In mainland China, chipmakers Semiconductor Manufacturing International Corp (HK:0981) and Hua Hong Semiconductor Ltd (HK:1347) experienced gains of 9.3% and 5.4%.

Policy Stimulus and Macroeconomic Tailwinds Bolster Performance

China's equity market, represented by the Shanghai Composite Stock Market Index, registered a 40.06% year-on-year increase, reaching 3,812 points as of September 10, 2025. This robust performance occurred despite lingering fragility in consumer sentiment, with retail sales growing only 5% year-on-year. The divergence highlights a strategic reallocation of capital, with retail investors shifting from real estate to equities, supported by significant fund inflows and policy stimulus. The Chinese government's commitment to AI, articulated in the 14th Five-Year Plan and 'Made in China 2025' initiative, is accelerating investment, with the AI industry projected to exceed $140 billion by 2030. Cloud infrastructure spending is forecast to reach $46 billion by 2025, underscored by Alibaba Group Holding Limited's (BABA) $52.4 billion three-year investment plan in computing resources.

Beyond Asia, Brazil, India, and Gulf Cooperation Council (GCC) markets have also demonstrated strength. GCC stock markets, in particular, attracted robust net foreign investment inflows of approximately $2.9 billion in September 2025. Saudi Arabia was a prime beneficiary, securing $2.1 billion following the Capital Market Authority's (CMA) decision to lift the 49% foreign ownership cap. This reform is expected to attract an additional $6 to $10 billion in passive inflows and elevate Saudi Arabia's weighting in the MSCI Emerging Markets Index to 4.7%.

Broad macroeconomic factors have also played a crucial role. A weaker U.S. dollar, moderating global inflation, and accommodative monetary policies from EM central banks, including the U.S. Federal Reserve's first interest rate cut of 2025, have fostered a 'risk-on' environment.

Divergent Regional Performance and Future Outlook

While the overarching narrative for emerging markets is positive, performance has been regionally divergent. Argentina's stock market, for instance, emerged as the world's worst-performing in 2025, with its Merval index declining around 30% year-to-date, and nearly 50% when measured in U.S. dollars. This underperformance is primarily attributed to heightened political risk following President Javier Milei's electoral defeat in Buenos Aires in early September, raising concerns about potential gridlock in his reform agenda.

Looking ahead, J.P. Morgan Research forecasts a potential slowdown in EM growth to a 2.4% annualized rate in the second half of 2025, partly due to the unwinding of front-loaded U.S. imports. However, EM central banks are anticipated to continue cutting rates, and EM currencies are expected to maintain their outperformance against a projected bearish U.S. dollar. The sustained demand for AI infrastructure, coupled with ongoing policy support and reforms across diverse emerging economies, suggests continued selective investment opportunities within these markets, though investors will remain attentive to evolving geopolitical dynamics and policy effectiveness.