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TRIPLE TAILWINDS PUT EM ON THE FAST TRACK TO 2026 GAINS

As 2025 draws to a close, emerging markets $(EM)$ look poised to shine. A rare alignment of positives: robust earnings growth, a dovish Federal Reserve and the accelerating artificial intelligence boom could propel EM stocks higher.

Analysts at Citi expect the MSCI EM .MSCIEF index to gain about 13% by year-end 2026.

Citi's bullish call rests on three forces: strong fundamentals, supportive monetary policy and AI-driven growth. Together, they create a compelling case for EM outperformance despite valuations sitting near historical highs.

Earnings momentum leads the story, with analysts forecasting 17% EPS growth next year, the strongest among major regions. While valuations are elevated, Citi says the structural tilt toward growth sectors in EM indices helps justify the premium.

Monetary policy adds another boost. Analysts note that Fed rate cuts without recession, the "goldilocks" scenario Citi expects has historically triggered outperformance in EM and other non-U.S. markets. If that pattern holds, 2026 could see broadening gains beyond Wall Street.

Artificial intelligence remains a powerful catalyst. Citi analysts project EM's leading AI players to grow earnings nearly 40% in 2026, almost double the pace of U.S. tech giants, while still offering a more attractive valuation-to-growth trade-off.

Country calls reflect this optimism: Korea tops the list with a potential 37% upside, driven by a memory-chip supercycle. Taiwan earns an upgrade on AI-linked demand, and UAE stands out in EMEA for its attractive valuations. China, however, slips to neutral amid weak revisions and a lackluster macro backdrop.

Risks remain: a faltering U.S. soft landing or cracks in AI optimism could derail the outlook. For now, though, analysts at Citi say emerging markets appear ready to ride the triple tailwinds into a promising 2026.

(Rashika Singh)

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EARLIER ON LIVE MARKETS:

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