Key Takeaways
- • Emerging markets are outperforming developed markets in 2026, driven by three structural factors: attractive valuations, light investor positioning, and U.S. dollar weakness—a combination that has historically preceded EM outperformance in every non-recessionary environment since 1988.
- • Emerging markets control excess manufacturing capacity for AI infrastructure (particularly in Korea, India, and Taiwan), offering cheaper valuations and higher earnings growth relative to expensive developed-market AI stocks.
- • China dominates battery and electric vehicle manufacturing, controlling 70% of the global battery market and 60% of new pharmaceutical molecules, positioning the country for continued market-share gains in automotive sectors.
- • A -0.9 correlation exists between dollar weakness and EM outperformance versus developed markets, creating a favorable macro backdrop for emerging-market allocations.
Summary
Emerging markets are positioned for continued outperformance over developed markets in 2026, according to Todd McClone, partner and portfolio manager at William Blair, speaking at the Canadian Investment Review's 2026 Global Investment Conference on June 8, 2026.
McClone identified three primary drivers of EM strength: attractive valuations relative to developed markets, extremely light portfolio positioning from institutional investors, and a weaker U.S. dollar environment. The dollar weakness factor carries particular significance: a -0.9 correlation exists between dollar performance and EM versus developed-market returns, and this relationship has held across every non-recessionary period since 1988. "Since 1988, in every non-recessionary environment that's [seen a] weak dollar, EM has outperformed developed markets. That's the situation we're in now," McClone noted.
A second key tailwind is emerging markets' leadership in artificial intelligence infrastructure. While developed-market AI stocks command premium valuations, emerging markets—particularly Korea, India, and Taiwan—possess the excess manufacturing capacity required to build AI transformers at scale. This capacity advantage translates into cheaper equity valuations and superior earnings growth for EM companies relative to their developed-market counterparts.
China's dominance in battery and electric vehicle manufacturing represents a third structural advantage for emerging markets. The country now controls 70% of the global battery market and has captured 60% of new pharmaceutical molecules since 2020, compared to 28% for the United States. This market-share expansion in high-growth sectors positions China and broader emerging markets for sustained competitive advantages in automotive and energy markets.
McClone identified three primary drivers of EM strength: attractive valuations relative to developed markets, extremely light portfolio positioning from institutional investors, and a weaker U.S. dollar environment. The dollar weakness factor carries particular significance: a -0.9 correlation exists between dollar performance and EM versus developed-market returns, and this relationship has held across every non-recessionary period since 1988. "Since 1988, in every non-recessionary environment that's [seen a] weak dollar, EM has outperformed developed markets. That's the situation we're in now," McClone noted.
A second key tailwind is emerging markets' leadership in artificial intelligence infrastructure. While developed-market AI stocks command premium valuations, emerging markets—particularly Korea, India, and Taiwan—possess the excess manufacturing capacity required to build AI transformers at scale. This capacity advantage translates into cheaper equity valuations and superior earnings growth for EM companies relative to their developed-market counterparts.
China's dominance in battery and electric vehicle manufacturing represents a third structural advantage for emerging markets. The country now controls 70% of the global battery market and has captured 60% of new pharmaceutical molecules since 2020, compared to 28% for the United States. This market-share expansion in high-growth sectors positions China and broader emerging markets for sustained competitive advantages in automotive and energy markets.
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