Q1 2026 CIO Review and Outlook

Overview

Asia and emerging markets experienced extreme volatility in the first quarter of 2026 as markets surged in the first two months, supported by strong demand for artificial intelligence (AI) and an easing of the global monetary environment. In March, however, they experienced a sharp pullback as the Iran conflict threatened global oil and gas shipments, and triggered a spike in energy prices. Within the asset class there were contrasting performances but overall, emerging markets and Asia outperformed the U.S. and developed markets over the period.

Impact of the Iran conflict

The strength of gains in Asia and emerging markets in January and February was a continuation of the secular and structural themes that supported performance through the latter part of 2025, including Asia’s dominance in AI-related semiconductor manufacturing. In our view, this also reflected an improving global investment cycle and a recovery in earnings growth in the asset class, backed by strengthening commodity markets and re-industrialization—where global demand for shipping, defense and energy-related infrastructure is increasing among advanced economies.

This investment environment was changed by a sharp risk-off period in March triggered by American and Israeli strikes on Iran, and Iran's response, including attacks on Gulf allies. The effective closure of the Strait of Hormuz, elevated energy and shipping costs, and concerns over inflation and slower global growth, drove significant shifts in investor positioning in capital markets. Within equities, markets that had attracted large inflows in prior months, such as South Korea, posted some of the steepest declines. As the conflict escalated, investors’ focus shifted toward assessing economies and markets that would gain from higher energy prices and those which were more exposed to associated risks.

Key Markets

North Asia

Taiwan and South Korea were among the strongest performing emerging markets during the quarter, backed by the strong demand-supply dynamic in central processing unit (CPU) chips and memory chips for U.S. AI hyperscalers. We believe valuations in this segment are still compelling and the fundamentals remain intact. South Korea is also benefiting from the global reindustrialization theme, particularly in defense, energy and shipping. Taiwan’s economy is less diversified and weaker than South Korea, and the market continued to almost singularly gain from the global dominance of its companies in the chip foundry sector.

While the economies of Taiwan and South Korea are dependent on imported oil and gas, the impact of elevated energy prices was more than offset by positive investor sentiment toward the dominance of their respective positions in global chipmaking. Investor confidence in South Korean equities was additionally supported by government-led capital market “Value-Up” reforms—which include mandatory treasury share cancellation—designed to eliminate the so-called “Korea discount”, and by new policies to nudge retail investors back into domestic equities from overseas equities through tax-advantaged accounts.

Japan

Like South Korea, Japan's market was also driven by technology and AI-related themes but its economy does not have the same magnitude of exposure to semiconductors. It is, however, benefiting from the increase in global defense spending. In March, the market experienced heightened volatility and, like Taiwan and Korea, the economy has a large dependence on Middle East oil and gas. There was also fluctuating sentiment toward the macroeconomic outlook, regarding the spending agenda of the Takaichi government, inflation, and whether an interest rate rise may materialize in the coming months. Valuations remained relatively high compared to the rest of Asia but earnings were steady during the period.

China

China’s equity market declined by almost 9% over the period. While some of this reflected concerns around Middle East oil supply and prices, we attribute the bulk of this derating to investor rotation out of Chinese large caps, which had delivered significant gains in the previous quarter, and into other markets with clearer growth attributes and stronger earnings growth, including South Korea and Taiwan.

Investors needed to be cognizant of having too much internet platform exposure and maintaining a balance in sectors with robust divided yields, like financials. These areas, along with hardware technology, helped support overall market performance, while broader consumer stocks were relatively weak. The dynamic gained greater traction with the onset of the Iran conflict, as dividend-orientated stocks performed well, while some of the wider owned, internationally known stocks underperformed.

In the terms of the energy crisis, China has so far been relatively shielded by its large oil reserves and ongoing diversification into renewable energy in industries like autos and with its electricity grid and power generation. We believe emerging industrialization themes are driving China’s economy as it continues to build its own supply chains and develop technology including AI.

India

India posted the biggest decline among major equity markets in the first quarter, continuing its underperformance relative to peers in 2025. Weakened investor confidence and outflows, amid concerns over economic growth and protracted U.S. trade negotiations, were exacerbated by the spike in energy prices. India is a large importer of oil and a significant component is shipped from Gulf states. The global boom in AI applications and related CapEx spending also diverted investor attention away to markets directly benefiting from the theme, including Taiwan, South Korea and China. In addition. India’s large IT sector was pressured amid concerns that AI technology will disrupt or diminish it.

As the quarter progressed, there were signs of improvement in economic growth and earnings. The derating of India’s market has significantly reduced India’s traditionally high valuations relative to peers and made some areas, such as financials and consumer discretionary, more attractive. But for the near term, the biggest challenges are the uncertainty over energy prices and potential AI headwinds.

Southeast Asia and EMEA

In Southeast Asia, Singapore was among the better-performing markets, particularly in financials and telecommunications, areas that have stable fundamentals with robust dividend yields. These generally well-run companies performed well amid global volatility in March.

Malaysia generated a gain while Indonesia declined more than 20%. Both economies import and export oil because of the need to balance domestic crude production with local demand for refined petroleum products. The contrasting performance of their markets reflects to some extent their differences in government subsidies and pricing policies in the energy sector.

Eastern Europe markets were also impacted by adverse sentiment related to energy prices. In the Gulf region, Saudi Arabia’s market gained 9%, primarily because of government support for the equity market through investment platforms including pension funds. In contrast, United Arab Emirates declined. While certain areas of this market have opportunities which are attractive on a valuation basis, the adverse geopolitical landscape remains a significant disincentive in the near term.

Latin America

The Latin America region, after years of underperformance, showed promising signs. Markets gains in Brazil, Peru and Colombia were in double digits, ahead of all major geographical equity markets in the quarter. Politically, investors are encouraged by the shifting bias from left to right, and macro and structural traits are also generating appeal. The region’s traditional strengths in commodities is a big positive as the global economy intensifies efforts in power generation for the AI boom. The region’s markets are also oil producers and net beneficiaries of higher energy prices.

Brazil is additionally well positioned from a macro standpoint. Interest rates are elevated and the central bank is widely believed to be on a rate-cutting trajectory, which is positive for the domestic economy, for business and consumers. Brazil, however, carries elevated risk, in part because of its domestic politics and the general election in October will, in our view, impact sentiment whatever the result.

Mexico was also a robust performer. It is positioned for a growth catalyst if discussions with the U.S. and Canada lead to a favorable renewed trade agreement for the country. As a cohost of the FIFA World Cup this year, Mexico should also be a beneficiary of increased consumption and tourism.

Outlook

Looking ahead, there will be a higher cost to the world for energy and shipping and for related industries and supply chains. Disruption in energy distribution and elevated oil and gas prices are expected to be a dampener on economic growth but the fluidity and uncertainty of the Middle East conflict make it difficult to extrapolate scenarios with reasonable degrees of conviction. The compelling diversification aspects of emerging markets means the impact of the crisis will not be uniform. Some markets will be hurt by higher-for-longer oil prices and some will benefit. As active managers we can adjust the beta of portfolios to take advantage.

Another geopolitical variable that may hold significance for the asset class is the planned summit between U.S. President Donald Trump and China’s Xi Jinping in May. While relations have been on a relatively benign track, the outcome of the meeting could either signal an improvement or a deterioration, which could then quickly feed through to sharp changes in global investor sentiment toward China and Asia.

Overall, we maintain a positive view that the structural drivers of emerging markets and Asia are improving, from earnings to corporate governance, to the development and application of AI, and in their ability to support nations building out their infrastructure as they pursue sustainable development. The asset class had an impressive start to the year, backed by significant investor inflows. The conflict has placed a pause on this to some extent but we do not believe the story has paused; rather, it may just take time to recover its cadence.

Sean Taylor
Chief Investment Officer