Emerging markets are driven by AI and metals

According to James Mackreides, this year's major emerging market winners have typically provided exposure to one of the two winning trends of 2025: AI-focused technology and the global metals rally

This year's top-performing emerging market (EM) isn't actually an emerging market at all. Any of the top developed economies in the world can compete with South Korea's advanced industrial base. However, the local bourse's stringent trading regulations force it to join Egypt and Peru in the global investment basket.

However, this year, the local Kospi index has increased by 66%. AI and a closing Korea discount are two significant tailwinds. Memory chip leaders Samsung and SK Hynix are profiting from Big Tech's semiconductor binge for the first theme. Second, Seoul has started enacting pro-shareholder reforms, emulating similar measures in Japan that sparked a multi-year surge in the stock market.

Emerging market successes.

Korea's gains have contributed to the MSCI EM benchmark's 26% gain so far this year. That increase easily surpasses the 18% gain for the MSCI equivalent index for developed markets, following years of trailing the developed-markets index.

These gains are partially due to the developing world's improved financial circumstances. A declining dollar and US interest rate cuts typically drive money away from Wall Street and toward more far-flung destinations. However, not everyone has benefited from the upswing. AI-focused technology and the global metals rally are two of 2025's top trends, and this year's major winners have typically provided exposure to both. Similar to Korea, Taiwans Taiex (+20.5 percent) is experiencing a surge in demand for AI equipment due in large part to the tremendous success of local chipmaker TSMC.

Hong Kong's tech-biased Hang Seng has performed even better, gaining 28.5 percent, while the mainland Chinese CSI 300 is up a healthy 17.5 percent. The MSCI EM index is now a more concentrated bet than many EM investors would prefer because the economies of East Asia together make up 60% of the index.

The third-largest component of the index, India, offers some diversity. China's early 2000s growth story is similar to the nation's exciting one. However, share prices are now stretched, and the BSE Sensex's 8% annual gain is unimpressive. Local markets provide little exposure to AI, despite India being a global leader in IT outsourcing.

Southeast Asia is not all the same. In the same year that index provider FTSE Russell upgraded Vietnam's VN index to emerging-market status, the index surged a third. The Indonesia IDX Composite has increased by 21%.

Amid indications of a domestic slowdown, the Philippines PSEi index has dropped 7%, while Malaysia's KLCI is flat. As investors flee political unrest and indications of a downturn in the nation's vital tourism industry, Thailand's SET index has fallen 10%.

Emerging markets benefit from the metals rally.

South Africa has shone thanks to Gold's 60% rally this year. With local miners and a better political outlook, the JSE Top40 index has had a fantastic year, rising 40%. Chile, the copper champion, has done even better, as evidenced by the IPSA index's enormous 50% increase.

However, not every commodity is made equal. Amidst low energy prices, the oil-heavy Saudi Tadawul all-share has dropped 13%. Despite the fact that their stock exchanges have increased by 28% and 32%, respectively, you couldn't tell that the US has picked fights with the governments of Mexico and Brazil this year.

According to Craig Mellow in Barrons, the White House's 50% tariffs on Brazilian imports have "backfired" because "Brazil exports more than twice as much to China as to the US." Brazil's agricultural prowess makes it an excellent trading partner. Investors also hope that, similar to Javier Mileis's success in Argentina, a pro-market candidate will win the presidency next year.

Emerging Europe has had yet another successful year. The largest market in the region, Poland, is rapidly catching up to Western Europe. Increased defense spending has contributed to the WIG20's 39 percent gain. Lastly, Athens' challenging post-crisis reforms are still paying off. The ASE index has increased 119 percent over the last three years and 41 percent this year. Finally, the long Greek tragedy is over.