Has the bull cycle begun?
6 FEB, 2026
Aberdeen Investments – Investment Research Team
Aberdeen Investments believes that a bullish cycle may have begun for emerging market (EM) equity performance, driven by the three Cs: Capex (capital expenditure), Carry (the impact of the U.S. dollar on the asset class), and Cheap valuations. However, it cautions about risks related to the monetisation of artificial intelligence (AI) investments.
Emerging markets exceeded expectations in 2025, with the MSCI EM Index outperforming developed markets for the first time since 2020, rising 34% in U.S. dollar (USD) terms (1). This performance came despite historically low allocations to the asset class and heightened geopolitical risks.
Aberdeen Investments believes this may mark the start of a prolonged period of outperformance versus the U.S. Despite the strong rally, the MSCI EM Index still trades at a 42% discount to the S&P 500, above its long-term average discount of 32% (2). On a cyclically adjusted basis (CAPE), emerging market equities are trading at an even deeper 60% discount (3).
According to Gabriel Sacks, Head of Asian Equities at Aberdeen Investments, emerging markets enter 2026 with strong momentum. Following a transformative 2025, resilience to geopolitical and political risks has been supported by attractive valuations, improving fundamentals, and a favourable macroeconomic backdrop. Looking ahead, global capital expenditure, supportive currency trends, and structural themes position emerging markets well.
As always, there are risks to manage. Concerns around overvalued technology stocks are not limited to the United States. However, emerging market tech valuations—particularly in Korea and Taiwan—are less demanding, and AI is just one of several earnings drivers for North Asian foundries. Demand for memory chips is recovering as broader non-AI demand rebounds, while India remains relatively insulated as a domestically driven consumption market.
What is driving growth?
The global economic outlook appears constructive, supported by policy easing in developed markets and global GDP growth forecast at around 3.4% (4), with emerging markets expected to account for a significant share of this expansion.
Investment in the real economy is driving GDP growth, with elevated global capital expenditure. Historically, such cycles have delivered faster earnings-per-share (EPS) growth in emerging markets. History appears to be repeating itself, as consensus earnings growth for EM stands at 18% for 2026 (5). There is therefore room for both earnings growth and valuation expansion to support the market.
Aberdeen highlights several structural drivers behind a potential bull cycle.
Capex (Capital Expenditure)
Fiscal deficits continue to rise, with governments leading a major global investment cycle driven by a wide range of policy objectives. This has resulted in increased spending on real assets, as governments address defence needs, energy security, supply-chain resilience, and infrastructure shortfalls.
In the United States, Japan, the European Union, and China, fiscal deficits are expected to remain elevated or increase through 2026, supporting real economic activity. Emerging market economies offer the industrial depth, technical expertise, and resource availability required to meet this demand.
AI-related capital expenditure is not slowing. Bloomberg consensus points to approximately USD 600 billion in capex by Meta, Google, Amazon, and Microsoft. TSMC has raised its capex forecast to a record USD 56 billion for 2026.
As a result, earnings prospects for hardware companies remain attractive, with Korean memory suppliers in particular leveraging their market position to increase prices. Consensus earnings growth for the technology hardware subsector stands at 49%. While risks are increasing, investment spending is accelerating and continues to drive earnings higher.
Carry (the impact of the U.S. dollar on the asset class)
Short-term currency movements are difficult to predict, but the structural case for a weaker U.S. dollar remains intact. U.S. policy dynamics, strengthening EM balance sheets, and rising domestic investment are driving capital outflows from the dollar and inflows into emerging markets.
This trend is already visible in the appreciation of emerging market and Asian currencies so far this year.
Cheap valuations and cost efficiency
The MSCI EM Index continues to trade at a discount of approximately 42% to the S&P 500, well above its long-term average discount of 32%.
Valuations of U.S. technology companies are increasingly being questioned, while the monetisation of data centres has yet to be fully proven. In contrast, the breadth of emerging markets is becoming more valuable. Domestic consumption is recovering, policy is easing, and market winners are expanding beyond AI into memory, industrials, and India’s domestic demand story.
