Emerging markets equities are staging a comeback on the back of cheaper valuations and strong performance from regional tech giants, with the MSCI Emerging Markets index up 45.4% over the past 12 months, well ahead of the S&P 500's 25.8% return. Stock futures were higher after the U.S. and Iran both signaled progress in talks aimed at ending the Middle East conflict, however, the two nations remain at odds over Tehran's enriched uranium stockpile and tolls on the Strait of Hormuz.
TL;DR
- MSCI EM up 19.3% YTD vs S&P 500's 8.3%, doubling developed market returns
- WTI crude testing $97 support amid US-Iran Hormuz negotiations uncertainty
- Dollar index at 99.39, up 0.30% but down 0.57% over 12 months
- Gold fell toward $4,500 as Iran Supreme Leader blocks uranium transfer abroad
- S&P 500 +0.55%, Dow +0.74% Friday on US-Iran diplomatic progress hopes
Global Macro Backdrop
The global macro environment on May 22, 2026 is dominated by two countervailing forces: EM economies delivered a total return of 33.6% in 2025, yet risk sentiment was dented today by a global rise in bond yields, driven by a combination of inflation concerns, rising expectations for central-bank rate hikes, and growing worries around government debt. U.S. 30-year Treasury yields are at their highest level since 2007.
Following a week of elevated inflation readings, markets are now pricing in roughly a two-thirds probability of a Fed rate hike in December. This hawkish repricing stems from persistent energy-driven inflation as oil prices remain elevated, nearly 50% above pre-war levels, supported by supply tightness and ongoing US inventory drawdowns. The country withdrew nearly 10 million barrels from its Strategic Petroleum Reserve last week, marking the largest release on record.
Aggregate EM economic growth for 2026 is expected to remain near 4%, reflecting both the resilience of large EM economies and strong export performance from select markets benefiting from global technology demand. However, the IMF raised expected EM inflation from 4.8 percent to 5.5 percent. The inflation outlook may push many EMs to tighten monetary policy even as economic growth struggles.
EM/Frontier Market Dynamics
The defining narrative of 2026 has been extraordinary EM outperformance. The MSCI Emerging Markets index is up 45.4% over the past 12 months, well ahead of the S&P 500's 25.8% return over the same period. The rally has so far shown no sign of stopping as EM equities almost double the return of the S&P 500 index, up 19.3% versus 8.3% year-to-date.
This rally is being driven by multiple factors. Our 2026 outlook for emerging market (EM) equities is driven by cyclical factors such as a weaker US dollar, more favourable global financial conditions and durable structural growth trends. We believe EM gross domestic product (GDP) is set to outpace developed markets meaningfully, underpinned by stronger demographics, rising domestic consumption and continued investment into manufacturing, infrastructure and digital ecosystems.
Technology sectors are leading the charge. Taiwanese chip giant TSMC is up some 40% year-to-date and accounts for almost 20% of the MSCI Emerging Markets ex-China index. Recent earnings from SK Hynix illustrate the continued strength of Korean semiconductors demand. Similar momentum is evident in China and Taiwan, where the semiconductors, telecommunications and AI-related sectors remain important contributors to market performance.
Regional divergence remains significant. A central axis of 2026 EM investing is the divergence between China and the rest of EM. China faces ongoing structural headwinds, including weak private sector confidence. Meanwhile, markets such as India, Mexico, Indonesia and parts of the Gulf stand to benefit from domestic demand strength and reform momentum.
FX Dynamics
Currency markets reflect the complex interplay between EM strength and energy shock pressures. The DXY exchange rate rose to 99.3899 on May 21, 2026, up 0.30% from the previous session. Over the past month, the United States Dollar has strengthened 0.81%, but it's down by 0.57% over the last 12 months.
The dollar's weakness over the past year has been a tailwind. One of the most persistent themes of 2025 was that the greenback's depreciation enabled dollar-denominated returns in EM assets to strengthen markedly, with the Brazilian real, Mexican peso, Chilean peso and South African rand achieving some of the most pronounced gains.
However, recent energy shocks are creating divergent pressures. Iran said it was reviewing the latest US proposal to end the conflict, after President Trump indicated he was willing to wait a few more days to "get the right answers" from Tehran. Another risk comes from the inflationary impact of the dollar, which rose against EM currencies upon the war's outbreak, after falling steadily from a recent peak in January 2025, and remains volatile, heavily dependent on the Fed's next moves.
Currency vulnerabilities vary sharply by country. On May 3, the lira fell 7% against the dollar in a single day, its largest one-day decline since 2018. The proximate trigger was a spike in oil prices following Middle East tensions, which widened Turkey's current account deficit and undermined investor confidence. Within two weeks, the Turkish central bank raised its policy rate by 200 basis points, but capital outflows accelerated, with $1.1 billion withdrawn from Turkish debt markets in May alone.
Commodity Markets
Oil remains the dominant commodity story, though price volatility has intensified as diplomatic developments unfold. WTI crude oil has been consolidating inside a symmetrical triangle pattern on the short-term time frame, with price recently pulling back from the resistance area near the $100.00 per barrel mark and sliding toward the triangle's rising support line. At $97.29, the commodity is now testing this floor.
WTI crude futures rose around 3% to above $101 a barrel on Thursday, partially recovering from the nearly 6% drop over the previous two sessions, as mixed signals from the US and Iran continue to fuel doubts that a near-term deal can be reached or that the Strait of Hormuz could be fully reopened. Reuters reported that Iran's Supreme Leader has issued a directive that the country's near-weapons-grade uranium should not be sent abroad, hardening Tehran's position on one of the key US demands in peace talks. Meanwhile, Iran announced the creation of a "Persian Gulf Strait Authority."
From a fundamental standpoint, any de-escalation in Middle East tensions could remove a key supply risk premium from oil prices, potentially accelerating a breakdown below triangle support and exposing WTI crude oil to steeper losses ahead. Reports of a draft agreement between the US and Iran, involving a potential reopening of the Strait of Hormuz, are currently easing global supply concerns.
Gold markets are caught between competing narratives. Gold fell toward $4,500 an ounce on Thursday as hopes for a US-Iran peace deal faded following reports that Iran's Supreme Leader Ayatollah Mojtaba Khamenei issued a directive ordering the country's uranium to remain on Iranian soil. The directive contradicted Israeli officials' claims that Iran's highly enriched uranium would need to be transferred out of the country as part of any peace deal. Meanwhile, Iran is reportedly restoring its military capacity at a faster pace than expected, stoking fears of a renewed conflict in the Middle East.
Geopolitical Developments
The US-Iran conflict dominates the geopolitical landscape, with negotiations reaching a critical juncture. Shipping traffic through the Strait of Hormuz has been largely blocked by Iran since 28 February 2026, when the United States and Israel launched an air war against Iran and assassinated its supreme leader, Ali Khamenei. In retaliation, Iran launched missile and drone attacks on Israel, US military bases, and US-allied Gulf states. The Iranian Revolutionary Guard Corps (IRGC) issued warnings forbidding passage through the strait, boarded and attacked merchant ships, and laid sea mines.
Iranian Foreign Minister Abbas Araqhchi asserted: "We cannot trust the Americans at all. As a result, everything has to be precise and everything has to be clearly defined before we can reach an agreement". He also underscored with regards to enrichment that "given the great difficulty of this issue in negotiations… this issue has almost reached a stalemate. Therefore, we must postpone it to the next stages of negotiations".
The impasse centers on nuclear concessions versus Strait reopening. The U.S. wants Iran to suspend uranium enrichment for at least a decade and remove its enriched uranium from the country. The new proposal, given to the U.S. via the Pakistani mediators, focuses on solving the crisis over the strait and the U.S. blockade first. As part of that, the ceasefire would be extended for a long period or the parties would agree on a permanent end to the war. According to the proposal, the nuclear negotiations would only start at a later stage, after the strait was open and the blockade lifted.
Beyond the Middle East, the US-Israeli war on Iran, launched on 28 February 2026 with coordinated airstrikes targeting Iranian leadership and nuclear infrastructure, has rapidly become the dominant geopolitical crisis of the moment. Oil prices have surged past $100 per barrel, prompting an emergency release of strategic petroleum reserves by IEA member nations, and the conflict's humanitarian and economic consequences are reverberating across global markets, shipping routes, and energy-dependent economies.
Key Data Points
| Metric | Value | Source | |--------|-------|--------| | MSCI EM YTD Return | +19.3% | Fund Selector Asia | | S&P 500 YTD Return | +8.3% | Fund Selector Asia | | MSCI EM 12M Return | +45.4% | Fund Selector Asia | | WTI Crude Price | $97.29 | FX Daily Report | | Brent Crude | ~$104-107/bbl | Various | | Gold | ~$4,500/oz | Trading Economics | | USD Index (DXY) | 99.39 | Trading Economics | | US 10Y Treasury | ~4.58-4.66% | Edward Jones | | S&P 500 (Intraday) | ~7,445 | TheStreet | | SPR Weekly Withdrawal | 10M barrels | Trading Economics |
FAQ
Q: Why are emerging markets outperforming so dramatically in 2026? A: The 2026 EM equity outlook is driven by cyclical factors such as a weaker US dollar, more favourable global financial conditions and durable structural growth trends. EM equities continue to trade at a sizeable discount to the US and other developed market peers on both earnings and book-value metrics. Technology sectors, particularly semiconductors in Taiwan and South Korea, are delivering exceptional earnings growth linked to AI infrastructure demand.
Q: What is the biggest risk to the current EM rally? A: The IMF raised expected EM inflation from 4.8 percent to 5.5 percent, which may push many EMs to tighten monetary policy even as economic growth struggles. Another risk comes from the inflationary impact of the dollar, which rose against EM currencies upon the war's outbreak and remains volatile, heavily dependent on the Fed's next moves. A Fed rate hike in December could trigger capital outflows and currency pressure across more vulnerable EMs.
Q: How close are the US and Iran to a deal to reopen the Strait of Hormuz? A: Mixed signals from the US and Iran continue to fuel doubts that a near-term deal can be reached or that the Strait of Hormuz could be fully reopened. Reuters reported that Iran's Supreme Leader has issued a directive that the country's near-weapons-grade uranium should not be sent abroad, hardening Tehran's position on one of the key US demands in peace talks. Negotiations remain stalled on the sequencing of Strait reopening versus nuclear concessions, with both sides at impasse.
Further reading
- IMF — World Economic Outlook — Primary source for the EM growth and inflation projections (4.8% → 5.5%) cited.
- MSCI Emerging Markets Index — Factsheet — Benchmark methodology and performance behind the +45.4% / +19.3% return figures.
- IAEA — Iran verification and monitoring — Official record on Iran enrichment and inspections, the core sticking point in the talks.
- US Treasury — Daily Treasury Par Yield Curve — Primary data for the 30-year yield "highest since 2007" claim.