Key takeaways
Emerging markets (EM) equities have posted strong gains over the past year, driven by improving fundamentals and the global AI build-out.
We see potential for further growth as supportive macro and structural trends – such as a weaker U.S. dollar and favourable EM demographics – remain in place.
Canada–EM correlations have declined as EM sector weights have shifted toward technology, improving diversification benefits for Canadian investors.
Investors seeking efficient, low‑cost EM exposure may consider the iShares Core MSCI Emerging Markets IMI Index ETF (XEC), which provides broad access across large-, mid- and small‑cap EM equities.
Emerging markets are back in the spotlight. In 2025, the MSCI Emerging Markets Index rose 34%, outperforming developed markets, and has added another 7% so far in 2026.1 This article explores the near-term catalysts and structural trends behind that performance, and discuss the potential portfolio benefits of EM exposure going forward.
1. Emerging Markets are powering the next phase of AI
After a successful 2025, EM equities have continued to deliver strong, broad-based performance year-to-date, with gains spread across multiple countries rather than a narrow set of winners. This strength has been driven by EPS growth and upward revisions, not multiple expansion (Figure 1), underscoring that momentum is fundamentally led. Looking ahead, EM are expected to post leading EPS growth among major regions, with forecasts around ~20% in 2026.2
Figure 1 – YTD total return decomposition
Source: LSEG Datastream, as of March 12, 2026. U.S. represented by the MSCI USA Index; euro area by the MSCI EMU Index; Japan by the MSCI Japan Index; emerging markets by the MSCI Emerging Markets Index (USD); and Canada by the MSCI Canada Index.
A key underlying driver is the next phase of the global AI buildout. The initial AI boom was dominated by U.S. mega‑caps focused on model development, chip design, cloud platforms and enterprise software. Now, the story is broadening to the “capacity‑driven” parts of the ecosystem — the global infrastructure required to train, run and deploy AI at scale. EM provide differentiated access to this side of the cycle, complementing U.S. leaders rather than replacing them.
At the index level, semiconductors make up about 16% of EM industry weights, with another ~6% in tech hardware.3 This tilt positions EM to benefit directly from the AI‑linked capex cycle in semiconductor manufacturing, memory, networking equipment, data‑center buildout and the energy infrastructure needed to power it. These trends are starting to show up in the data, with EM forward earnings growth now outpacing those in the United States (Figure 2).
Figure 2 – EM and U.S. 12m forward earnings growth
Source: LSEG Datastream, as of March 12, 2026. Emerging markets represented by the MSCI Emerging Markets Index and the U.S. by the MSCI USA Index.
Within EM, South Korea, Taiwan and China are central to this dynamic and together account for more than half of the EM index weight:
South Korea – depth in memory and key components, plus broad exposure to upstream hardware supply chains.
China – more applications‑led, with platforms and internet ecosystems driving AI adoption and efficiency gains.
Taiwan – direct leverage to advanced semiconductor manufacturing powering AI compute.
2. Structural tailwinds support Emerging Markets growth
Recent macro conditions have also been supportive for EM assets. A weaker U.S. dollar and the start of Federal Reserve rate cuts in 2025 improved global risk appetite, encouraged capital flows toward higher‑growth markets, and eased financial conditions across many EM economies. With several EM central banks also moving toward rate cuts early after tightening, the resulting macro backdrop has reinforced growth prospects and supported EM earnings momentum.
Looking ahead, EM also offer differentiated exposure to structural domestic demand shaped by several powerful secular forces. Demographic divergence is a key driver, with many EM countries benefiting from younger populations and expanding workforces at a time when developed markets are aging. At the same time, geopolitical fragmentation and supply‑chain realignment are redirecting capital investment, manufacturing capacity, and trade flows toward select EM regions. Together, these forces may provide additional tailwinds for economic activity, corporate revenues, and earnings resilience across the EM universe.
3. Emerging markets has become a stronger diversifier for Canadian-based portfolios
Figure 3: Canada and EM sector profiles are diverging
Canada is represented by the S&P/TSX Composite Index and EM is represented by the MSCI Emerging Markets Index. Sectors are based on GICS. Data from January 1, 2010 to February 28, 2026. Source: Bloomberg.
Increasing EM equity exposure can enhance diversification and help reduce overall portfolio risk. Over the past five years, global indexes that include EM — such as the MSCI ACWI — have shown lower volatility than developed‑market‑only indexes like the MSCI World4.
Canadian investors with a home‑bias — meaning a higher allocation to domestic equities — may question EM’s diversification benefits, given the historical view that Canada and EM were both commodity‑sensitive and therefore highly correlated. This was once true: in 2010, both markets carried heavy Materials and Energy weights, and correlations exceeded 80%.5
But this relationship has changed meaningfully. EM sector composition has shifted toward Technology (32%), while Materials and Energy have fallen to roughly 12%.6 Meanwhile, Canada’s equity market remains heavily concentrated in Energy and Materials at around 30% (Figure 3).7 This structural divergence has driven a decline in Canada–EM correlations over time — to about 42% today (Figure 4), even lower than Canada’s correlations with the U.S. and other developed markets. As a result, EM has become a more effective diversifier for Canadian investors.
Figure 4: Correlation between Canadian and EM equities have declined
The 5‑year rolling correlation between the S&P/TSX Composite Index and the MSCI Emerging Markets Index (CAD) is calculated using monthly return data from January 2010 to February 2026. Source: Bloomberg.
How Canadian investors can access Emerging Markets
For investors seeking access to EM growth, ETFs can be a simple and efficient implementation tool. We’ve seen accelerating demand for EM ETFs as investors look to participate in these opportunities — nearly US$44 billion has flowed into EM ETFs in the first two months of 2026 alone, matching the total inflows for full year 2025. Below we highlight three iShares ETFs that offer diversified exposure across emerging market countries and sectors through a single vehicle.
iShares Core MSCI Emerging Markets IMI Index ETF (XEC) seeks to track the market cap-weighted MSCI Emerging Markets Investable Market Index, offering low‑cost, broad exposure to more than 3,000 large‑, mid‑, and small‑cap emerging markets equities.
iShares Emerging Markets Fundamental Index ETF (CWO) provides exposure to over 400 emerging markets equities using a RAFI® fundamental weighting approach, based on metrics such as dividends, free cash flow, sales, and book value. This methodology seeks to reduce concentration in more expensive stocks while increasing exposure to companies with stronger fundamentals.
RBC Emerging Markets Dividend Fund – ETF Series (REMD) provides exposure to EM companies trading at attractive valuations with above average dividend yields. The fund is actively managed and aims to provide long-term total returns.