EM stocks post best August since 2004 as rally broadens

The MSCI Emerging Markets Index closed out August with its best monthly performance for the period since 2004, as commodities strength and broadening participation from small-cap stocks propelled developing-world equities higher despite headwinds from the Iran conflict and rising U.S. Treasury yields.bloomberg+1

Broad-Based Gains Extend a Banner Year

The rally extended what has been a standout year for emerging markets. EM equities recorded their strongest quarterly performance since 2009 in the second quarter, returning 23.3% in U.S. dollar terms, driven by a resurgence in global risk appetite and enthusiasm around the AI trade. Companies including SK Hynix ↘ 0.79%, Samsung Electronics and Taiwan's MediaTek were among the top performers during that stretch.ubs

The August gains came despite a mid-month interruption when a surge in long-term U.S. Treasury yields toward 5% and oil prices pushing back above $90 a barrel briefly stalled the rally, according to Bloomberg. Renewed tensions in the Middle East added to investor caution, snapping a four-day winning streak in EM stocks before buying resumed.bloomberg

Small Caps and Commodities Lead the Charge

A notable feature of August's advance was the outperformance of smaller companies and commodity-linked markets. Small-cap growth stocks led gains in several sessions, with Indonesia and South Korea posting strong returns. The broadening rally has drawn attention from analysts who note that EM returns in 2026 had been concentrated in a handful of large AI and semiconductor names. According to Neuberger Berman, just three companies — TSMC Taiwan Semiconductor Manufacturing Company Limited ↗ 0.36%, Samsung Electronics and SK Hynix — accounted for 14 percentage points of the index's roughly 22% year-to-date gain through mid-year.nb+1

Risks Linger Amid Structural Tailwinds

The rally's durability faces several tests. UBS Asset Management flagged renewed conflict between the U.S. and Iran, a stronger dollar and a potential reversal in AI-related positioning as key risks. Uncertainty around Fed Chair Kevin Warsh's hawkish rhetoric on inflation has unsettled rate expectations, with the 10-year Treasury yield climbing 57 basis points year to date through July.ubs

Still, structural supports remain in place. A weakening dollar trend, AI-driven capital expenditure across Asia and attractive valuations — with EM equities trading at a forward price-to-earnings ratio of roughly 14 times — continue to draw capital into developing markets. Alliance Bernstein noted that EM equities ranked among the best-performing asset classes in the first half of 2026, with returns increasingly broadening beyond the technology sector.mandg+2