In the past 12 months we have experienced tensions in Asia (between China and the west), the Middle East, and Europe (Russia and Ukraine).
Geopolitical risks remain elevated and are increasingly influential in shaping capital flows, commodity prices and investor sentiment.
Growth dynamics also vary significantly across regions and sectors.
Visible supply chain disruptions, concerns over inflation, and underlying regional economic growth are some obstacles that pertain to emerging market economies.
Emerging Asia, in particular, is home to several nations that are heavily reliant on energy imports. Nations such as Indonesia, Thailand and the Philippines are experiencing surging fuel subsidy costs to keep prices stable; and India, which is vulnerable to energy supply shocks, is facing risks of higher inflation.
However, these are issues that the rest of the world faces as well, albeit to different extents.
US-China tensions remain a persistent feature of the external backdrop.
We believe that while there may be ups and downs in the relationship between both countries, disagreements will continue to feature.
China, however, has shown that it has been able to manage the strained relationship well, but we think that the relationship is likely to remain fragile.
On the positive side, structural growth themes are evident, with AI being one of the key drivers.
While there have been bouts of volatility in the AI trade, demand continues to expand.
This is driven by increased uptake, improvements in model performance and widening productivity gains.
AI-related investment continues to support the broader information technology sector.
We believe that AI will continue to have a strong investment case across major emerging markets, benefiting companies across the supply chain, including semiconductors, electronics manufacturing services, power supply and printed circuit board companies.
This conviction drives our overweight position in the IT sector. These companies are primarily in South Korea and Taiwan.
Besides traditional IT enablers, companies across many sectors are utilising AI to enhance productivity and competitive positioning.
Notably, Chinese online platform companies are transitioning away from legacy digital models, embedding proprietary AI tools directly into their core e-commerce and entertainment offerings to drive a more optimal user experience.
The electric power demands of AI are necessitating further investments in grid infrastructure, power generation and energy storage.
Chinese industrial companies across power transmission equipment, energy storage, and data centre engines are well positioned to benefit from this cycle.
Domestically, several countries have implemented policies or are in the midst of reforms.
We believe that these could provide us with insight for the short and/or medium term.
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China
China’s central bank expects to ease its monetary policy in 2026 to support growth and domestic demand.
China’s GDP growth target for 2026 is between 4.5 per cent and 5 per cent, and boosting domestic demand remains a top priority.
This has taken the form of renewal of consumer goods trade-in programmes, and policies to support private investment and consumer spending.
However, structural headwinds in China remain.
These include a shrinking population and an ageing society. In addition, the anti-involution campaign has lost momentum somewhat.
Worries over excessive competition in several sectors, particularly e-commerce and food delivery, remain.
Brazil
Brazil’s anticipated monetary easing cycle commenced in March, validating a core pillar of our macro recovery thesis.
However, the recent surge in the prices of oil and other commodities could impact the pace of rate cuts.
Beyond structurally reducing corporate borrowing costs and alleviating debt-servicing burdens, declining rates fundamentally diminish the entrenched appeal of local fixed income investments, catalysing a much-needed domestic capital rotation back into risk assets.
This dynamic could support capital flow back into equities. Valuations remain attractive.
India
In 2025, the Indian government introduced a mix of monetary easing and fiscal/tax measures to support demand, including interest rate reductions and a major reform in its goods and services tax regime, which resulted in lower tax rates on consumer goods.
With these moves, India has a suite of pro-growth policies that should yield the full effects in 2026.
However, the Indian economy currently faces headwinds from higher oil prices, which remain a key risk.
The Indian economy is characterised by its large domestic market and limited dependence on trade exports.
It has favourable demographics, rising income levels and evolving consumption patterns, which will drive discretionary spending and demand for more premium offerings.
However, there is also a risk that technological advances in AI could adversely affect job opportunities in the country. We remain selective as we balance both the risks and opportunities in India.
Chetan Sehgal is the lead portfolio manager of Templeton Emerging Markets Investment Trust