Investment Weekly: EMs lead in the first half
6 July 2026
Key takeaways
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Back in March, higher oil prices were the reason central bankers turned hawkish. Now oil has slipped back, so why hasn’t the hawkishness eased?
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A few months ago, concerns about AI-driven job losses were widespread, especially as the US labour market appeared fragile. More recently, stronger employment data have helped shift attention towards a potential “Jevons paradox” dividend for jobs.
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Emerging market (EM) local currency bonds have shown resilience in recent weeks, supporting signs of maturity in the asset class. That said, a stronger dollar could still be a headwind.
Chart of the week – EMs lead in the first half
It is half-time for markets in 2026, so it’s worth pausing to review what’s worked and what might matter in the second half. The first six months were shaped by the stop-start conflict in the Middle East and sharp style rotations. A broadening out of performance beyond US tech, which started late last year, stalled in March, and resumed later in the half.
US equities finished higher, driven by strong profits and the AI boom. In Europe, a two-year profits drought ended, with reported earnings growth in H1 and forecast growth of 18% for FY2026. But it was emerging markets that led across both equities and bonds – without the help of a weaker US dollar that boosted returns in 2025. Three themes stood out:
First, EM equities delivered 24% in USD terms – more than double US and DM ex-US indices – despite geopolitical tensions, a firmer dollar, and elevated oil prices.
Second, fundamentals drove returns. AI capex supported profits in South Korea and Taiwan, while firmer commodity prices boosted gains in Latin America. EMs delivered some of the fastest earnings growth globally, with above-average dividends adding support. Even so, EM valuations fell to 11.5x forward P/E versus 17.5x for global equities.
Third, China has missed out – for now. China saw material de-ratings as investors crowded into AI winners, and earnings are expected to move from flat earlier this year to 13% in FY2026. China offers balanced sector exposure, supportive policy, and discounted valuations.
With the second half under way, strong capex should keep AI-related profits flowing, but market performance can broaden out. Other sectors adjacent to the AI boom, both upstream and downstream, could be the next market leaders – with emerging markets well-positioned to benefit.
Market Spotlight
Chips and choppiness
Asian stocks posted strong but uneven returns in the first half of 2026. Markets most exposed to the AI supply chain led performance, while Middle East tensions and related oil-price volatility disrupted broader risk appetite.
A standout feature of H1 was the surge in South Korea and Taiwan (MSCI indices up 119% and 64%, respectively in USD terms), supported by accelerating tech-sector earnings growth as the AI-driven investment cycle continued.
Prior to the conflict-driven volatility in March, performance in Asia had started to broaden. Stock markets aligned with the AI supply chain rallied, with Japan up 16%, and Thailand seeing a remarkable 28% gain pre-conflict. Meanwhile, markets with relatively attractive valuations and those with higher dividend yields also generally held up well. They included Hong Kong and the Philippines – which were both up 13% before the conflict.
Looking ahead, Asia’s earnings outlook might stabilise if oil prices remain contained and policy support across the region persists. Continued demand from the AI buildout and higher capital spending should underpin technology earnings and could help lift tech-adjacent sectors as H2 progresses.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 03 July 2026.
Lens on…
Staying hawkish?
Back in March, higher oil prices were the reason central bankers turned hawkish. Now oil has slipped back, so why hasn’t the hawkishness eased? One explanation is geopolitical risk: the fear of another oil shock. It’s certainly an age of uncertainty for investors. But one‑year ahead oil futures are below USD 70 per barrel, and the curve isn’t flashing stress. A second possibility is a more hawkish Fed under Chair Warsh. Perhaps, but he’s already distanced himself from the old playbook of heavy forward guidance. He also favours trimmed‑mean inflation, and long‑run inflation signals aren’t giving him much to worry about. The 5-year/5-year inflation swap has dipped lower, for example. |
Which leaves the third explanation: the driver of hawkishness has shifted away from cost‑push fears and back towards stronger growth. US macro surprises and supernormal profits have revived talk of “growth exceptionalism”. Rebuilding oil reserves could lift energy investment too.
Jevons above
A few months ago, concerns about AI-driven job losses were widespread, especially as the US labour market appeared fragile. More recently, stronger employment data have helped shift attention towards a potential “Jevons paradox” dividend for jobs. Jevons paradox suggests that when a resource becomes cheaper and easier to use, overall demand can rise by more than the cost falls. As AI tools become more affordable, adoption is rising rapidly. The impact on employment, however, will depend on whether AI mainly replaces certain tasks (acting as a substitute) or supports workers to do more (acting as a complement). It will also depend on how many new roles emerge – who had heard of “prompt engineers” just a few years ago? |
History indicates that major technologies tend to boost productivity, living standards, and total employment over time. Even so, disruption is likely: some roles may disappear, and workers may face retraining and transition challenges. So, while the long-run impact of AI on the labour market, living standards, and asset prices may well be positive, the path could be bumpy.
Local resilience
Emerging market (EM) local currency bonds have shown resilience in recent weeks, supporting signs of maturity in the asset class. Take the robust reaction to the recent strength in the US dollar following June’s Federal Reserve meeting, when markets interpreted the emphasis on price stability as likely to mean tighter monetary policy. In previous cycles, that might have triggered broad-based weakness across EM local debt. Recent sharp falls in oil prices, helped by progress on reopening the Strait of Hormuz, have strengthened the disinflation outlook in some EM economies. Bond markets in countries such as Mexico and South Africa have rallied despite a rise in US Treasury yields and the stronger dollar. |
This suggests that investors are looking at EM local currency bonds through the lens of domestic inflation and policy fundamentals, rather than their historical inverse relationship with the dollar. That said, a stronger dollar could still be a headwind.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, Factset. Data as at 7.30am UK time 03 July 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 03 July 2026.
Market review
Global equities rose after recent declines. In the US, major indices advanced in a holiday-shortened week, and the equal-weighted S&P 500 reached a record high despite weakness in chipmakers and other AI beneficiaries, as reflected in an extended drop in the Philly Semiconductor index. Broad-based gains outside the technology sector supported European markets, with the DAX leading the rally. Asian markets were mixed but mostly higher: the Nikkei 225 had a choppy week and ended slightly higher, while the Kospi pulled back further. The Hang Seng rebounded, alongside gains in the Shanghai Composite and the Sensex. In rates markets, the US Treasury yield curve bear-steepened, reversing its recent move, as investors digested the latest macro data and Fed chair Kevin Warsh’s remarks. Meanwhile, other major sovereign yields climbed, with 10-year Japanese government bond yields refreshing a multi-decade high. In FX, the US dollar weakened after soft non-farm payrolls data.
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