Emerging markets are expected to outperform in the second half of 2026, supported by attractive valuations, easing inflation, and favorable monetary policy, with investors increasingly drawn to equities tied to artificial intelligence and the broader technology cycle.

EM equities delivered about a 24% return in USD terms in the first half of 2026, led by AI-related capex boosting profits in South Korea and Taiwan and firmer commodity prices aiding Latin America.

The overall message is cautious optimism about EMs, focusing on AI beneficiaries and policy dynamics, with no explicit buy/sell recommendation.

AI winners are a central investment theme, with investor interest expanding beyond tech to sectors positioned to benefit from AI’s broader economic impact.

Risks include market volatility from sustained earnings growth and heavy tech capex, with the Jevons paradox suggesting demand for computing resources could stay elevated longer than anticipated.

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Central bank policy remains influential, with the US Federal Reserve expected to hold its stance as global conditions are shaped by supply-side shocks.

HSBC remains cautiously pro-risk, prioritizing access to growth in Asia and emerging markets amid uncertainty and sticky inflation.

HSBC emphasizes access to growth in Asia and EMs as the outlook remains uncertain and inflation pressures persist.

The report discusses the Jevons paradox in AI, suggesting cheaper, more efficient AI could boost overall demand for computing resources and spur further investment in the AI ecosystem.

Central bank policy may shift toward stronger growth and resilient profits, with the Fed possibly on hold through 2026 as growth dynamics improve and oil/geopolitics concerns ease.

Asian equities, especially those in the AI supply chain, have posted strong returns, but ongoing high-tech earnings growth and capital expenditure could sustain upside alongside rising volatility.