Finding opportunities in a strengthening emerging markets landscape

Fidelity Emerging Markets Limited portfolio managers Nick Price and Chris Tennant provide their outlook for 2026, highlighting why they believe shifting fiscal dynamics, a softer US dollar and renewed strength across the tech supply chain are creating a more supportive backdrop for emerging markets. They also outline how they are looking to capture emerging opportunities while navigating ongoing risks in China and across the broader asset class.

Outlook for the strategy in 2026

The outlook for EM today appears positive. The valuation backdrop is favourable, with EM trading at a multi-decade discount to the US even after the recent rally. The outperformance of the US has largely been driven by excitement around AI, which overlooks the fact that the bulk of the tech supply chain sits in markets like Taiwan and Korea, and much of the value accrual from AI and datacentres will go to EM companies.

The fiscal backdrop is another tailwind. The US has an elevated fiscal deficit and for the first time, people are questioning the sustainability of its debt. Against this backdrop, the relative fiscal position of EM looks very strong, as broadly we have seen much more fiscal constraint among EMs during this cycle. While the US drew on the fiscal toolbox during Covid, we saw the opposite in most EMs, particularly China, which tightened policy to deflate the property bubble.

Today we are starting to see this dynamic shift, as the fiscal backdrop and policy unpredictability weigh on appetite for US assets, while China has shifted to reflating the economy, having achieved what it set out to do in the property sector. Much of the weak sentiment towards EM in recent years has been driven by the drawdown in its largest constituent, China, and it now appears that much of what drove EM’s derating is reversing.

Today’s world of fiscal largesse is also resulting in a weaker US dollar. If that persists, it’s a very good backdrop for EM, supporting local currencies and resulting in less imported inflation, as well as offering a boost for commodity exporting economies.

EM as an asset class is far from perfect, with continued risks around populism, geopolitics and trade tensions, although these are also issues that we face in the developed world. But overall, with the tailwind of a weaker dollar and a relatively robust fiscal position, we think that EM looks well positioned today, and there are plenty of opportunities for those willing to take a selective approach to the market.

How is the portfolio positioned against this backdrop?

We have become increasingly constructive on the electrification opportunity-set this year. The shift in global power generation and the build-out of renewables require extensive grid reinforcement, driving copper demand. Copper supply remains constrained following a decade of underinvestment, and this year is likely the first where mine supply declines. We see opportunities among several high-quality copper miners, and also have direct exposure to the theme of electrification through Chinese electrical equipment makers and battery producers.

Gold is another area of focus. The historical relationship between gold and real rates has broken down since the confiscation of Russian reserves and the surge in global fiscal deficits, and investors and central banks have been increasing allocations to gold as a store of value. Despite the price moves this year, gold miners continue to look attractively valued and generate high free cash flow yields, while many miners have also improved capital discipline.

We remain favourable on the technology hardware space and are increasingly focusing attention further down the tech supply chain, for example to makers of switches for server networking. In memory, we are seeing end demand broadening out beyond the attractive area of high bandwidth memory (used in AI chips) to traditional DRAM, where the supply-demand backdrop is also positive.

We continue to see opportunities within financials. In smaller EM countries, banking sectors are often oligopolistic, generating strong returns on equity while trading near book value, and this has resulted in excellent value across much of the universe, particularly in Central and Eastern Europe. We also like select fintechs where we see a long runway for growth and capacity for market share gains.

The backdrop in China remains complex, with continued weakness in the property market, and a muted consumption backdrop. However there do remain opportunities in the market for active stock pickers. In addition to technological leaders in areas like electrical equipment and batteries, we have exposure to underpenetrated consumer ‘experiences’ categories like music streaming and travel. More broadly, in China we are closely watching the anti-involution drive aimed at reducing oversupply, as well as the potential for a re-rating in the A shares market given record levels of household deposits and a stagnant property market.