Emerging Markets Face Headwinds Despite AI-Driven Rally Emerging markets experienced a challenging July, despite a strong year-to-date performance driven by optimism surrounding artificial intelligence (AI) investments. A significant factor contributing to this volatility is the deep skepticism among investors regarding the sustainability of the substantial capital being injected into AI infrastructure.
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Emerging Markets Face Headwinds Despite AI-Driven Rally Emerging markets experienced a challenging July, despite a strong year-to-date performance driven by optimism surrounding artificial intelligence (AI) investments. A significant factor contributing to this volatility is the deep skepticism among investors regarding the sustainability of the substantial capital being injected into AI infrastructure.
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Emerging markets experienced a turbulent July, marked by investor skepticism despite a year-to-date gain of approximately 18% in the MSCI emerging equity index by early August 2026. This performance, while robust compared to the S&P 500’s advance in 2026, is a decline from the 28% gain seen between January and June. The volatility is largely attributed to investor doubts about the long-term profitability and sustainability of massive investments in artificial intelligence, particularly impacting major chipmaking hubs like South Korea and Taiwan.
South Korea and Taiwan, which together constitute a significant portion of the MSCI Emerging Markets Index, have seen their stock markets soar in 2026 due to AI-related demand for chips and memory. For instance, the iShares MSCI South Korea ETF surged over 70%, and the iShares MSCI Taiwan ETF gained nearly 50% by July 21, 2026. However, concerns over AI capital expenditure sustainability led to a rapid sell-off in semiconductor stocks, causing both countries to cede market capitalization ground in July 2026. The Korea Composite Stock Price Index (KOSPI) experienced a significant rebound on July 31, 2026, jumping nearly 18% after earlier losses, following positive earnings reports from major tech companies like Microsoft. Despite this, the KOSPI remained below its June peak of over 9,000. Similarly, Taiwan’s TAIEX saw a record single-day fall in combined margin balances on July 28, 2026, indicating significant selling pressure.
Beyond AI-related concerns, emerging markets in the second half of 2026 also face other headwinds, including geopolitical risks such as the renewed closure of the Strait of Hormuz in July, and potential challenges from El Niño and new US tariffs. While AI exports have provided some offset against rising US trade protectionism for certain economies, many remain exposed to these broader risks. The International Finance Corporation noted in May 2026 that while AI offers emerging markets a pathway to boost productivity and economic transformation, its diffusion remains uneven due to gaps in infrastructure, data availability, skills, and institutional readiness.