Technology deleveraging is nearing its end, but geopolitical conflict and rate-hike risks still hang over emerging markets

Overview

The report reviews the performance of global emerging market equities, earnings revisions, currencies, commodities, and fund flows in July 2026. Emerging markets declined for a second consecutive month overall, mainly due to sharp deleveraging in artificial intelligence and technology trades in South Korea and Taiwan, China, as well as the oil price shock triggered by escalating Middle East conflict. At the same time, emerging market earnings expectations continued to be revised upward, equity fund flows turned marginally positive, and China, Latin America, and parts of ASEAN delivered stronger performance.

Core views

The report believes the concentrated deleveraging process in South Korean technology stocks may now have been completed, with the sharp month-end rally indicating some easing of selling pressure, but the sustainability of AI capital expenditure, financing and commercialization challenges, and competition from China remain fundamental concerns. Regionally, Colombia, China, Brazil, and ASEAN performed strongly, while South Korea and Taiwan, China lagged significantly. Earnings revisions improved overall, especially in South Korea, Colombia, and Taiwan, China; South Africa, Turkey, and India saw larger downgrades. At the macro level, Middle East conflict, rising crude oil prices, and the possibility that the Fed raises rates earlier than expected are the main risks.

Analysis framework

The research compares monthly performance across global and emerging market indices, breaks down returns by country, region, and sector, and combines consensus earnings revisions, valuations, FX, commodities, fund flows, liquidity, and macro policy forecasts to assess market drivers and regional rotation direction.

Methodology notes

• Market performance analysisCross-region and sector relative return comparison

  Compares USD returns for emerging markets with the S&P 500 Index, developed markets, and emerging market regions, countries, and sectors.

  This method is used to identify the main sources of emerging markets' underperformance in July and shows that South Korean technology stocks were the largest drag, while Latin America, China, and parts of ASEAN contributed positively.

• Fundamental analysisConsensus earnings revisions

  Tracks the scale of upward or downward revisions to consensus EPS expectations for 2026 and 2027 over windows such as one month.

  Earnings revisions are used to judge whether price moves are supported by fundamentals; South Korean share prices fell sharply even as earnings expectations were revised up substantially, showing a divergence between position deleveraging and fundamentals.

• Flow analysisFund flow decomposition

  Breaks down emerging market fund flows by ETFs, non-ETF funds, and funds in different regions.

  Overall fund flows turned only slightly positive in July, mainly relying on ETF inflows, while active and non-ETF funds continued to see redemptions, indicating that the improvement in flows is uneven.

• Macro scenario analysisPolicy rate and geopolitical transmission

  Assesses the impact of the Fed policy path, Middle East conflict, and energy prices on emerging market risk assets, currencies, and commodities.

  Earlier rate hikes could weigh on gold and emerging market valuations, while higher oil prices benefit some Latin American exporters but increase inflation and margin pressure for import-oriented Asian economies.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI Emerging Markets Index

  Core benchmark of the report

  Strengths

  Earnings expectations for 2026 and 2027 are being revised up at an accelerating pace, and equity fund flows turned marginally positive in July.

  Weaknesses

  Dragged down by deleveraging in South Korean and Taiwan, China technology stocks, it fell 3.3% in July and underperformed developed markets.

  Comparison

  Over the same period, the S&P 500 Index fell 0.1% and developed markets rose 0.5%.

  Risks

  Earlier Fed rate hikes, Middle East conflict, rising oil prices, and further cooling of the AI trade.

• South Korean equities

  The largest drag on emerging markets in July

  Strengths

  Earnings expectations were revised up significantly, growth and management guidance from technology leaders remained strong, and deleveraging may have temporarily ended.

  Weaknesses

  The MSCI Korea Index fell 17.9% in July, with position unwinds by leveraged funds and hedge funds amplifying volatility.

  Comparison

  South Korea's decline was significantly larger than Taiwan, China's 5.8% drop and it materially underperformed emerging markets overall.

  Risks

  AI commercialization, sustainability of capital expenditure, financing conditions, and competition from China.

• Chinese equities

  One of the main positive contributors to emerging markets in July

  Strengths

  The MSCI China Index rose 8.6%, internet leaders rebounded, and expectations for policy stimulus increased.

  Weaknesses

  The technology sector still faces uncertainty from the cooling global AI trade and intensifying competition.

  Comparison

  China significantly outperformed the MSCI Emerging Markets Index, with China's consumer discretionary and financial sectors standing out.

  Risks

  Policy implementation falling short of expectations and volatility in technology stock fundamentals.

• Latin American equities

  Beneficiary of commodity prices and regional rotation

  Strengths

  It rose 4.8% in July, with Colombia and Brazil up 20.1% and 6.3%, respectively, while higher oil prices benefited exporters.

  Weaknesses

  Regional funds still recorded outflows of USD 1.1 billion, and expectations for Brazilian rate cuts weakened significantly.

  Comparison

  It significantly outperformed Emerging Markets Asia, which fell 4.5%.

  Risks

  Historical weakness ahead of Brazil's general election, rising inflation expectations, and Fed rate hikes compressing room for local easing.

• Gold

  Precious metals strategy watch asset

  Strengths

  It rose slightly by 1% in July, with geopolitical conflict providing some safe-haven support.

  Weaknesses

  The report believes the balance of risks is skewed to the downside.

  Comparison

  Silver fell 2.8% over the same period, while crude oil and industrial metals performed more strongly.

  Risks

  Fed rate hikes earlier than expected and rising real rates.

• Brent crude oil

  Main transmission asset for geopolitical shocks

  Strengths

  Middle East supply and transport risks drove a 23.6% gain in July, benefiting some Latin American exporters.

  Weaknesses

  It retreated from gains of nearly 40% during the month, while rumors of a peace agreement increased price uncertainty.

  Comparison

  WTI crude rose 21.8% over the same period.

  Risks

  Changes in the U.S.-Iran situation, transport disruptions in the Strait of Hormuz and the Red Sea, and potential peace arrangements.

Key data

• MSCI Emerging Markets Index return in July-3.3%June was -1.7%; in July it lagged the S&P 500 Index at -0.1% and developed markets at +0.5%.
• Best- and worst-performing marketsColombia +20.1%; South Korea -17.9%Indonesia and Poland rose 11.2% and 10.5%, respectively; Taiwan, China fell 5.8%.
• Regional performanceLatin America +4.8%; Emerging Markets Asia -4.5%Central and Eastern Europe, Middle East and Africa rose 1.2%.
• MSCI Emerging Markets earnings revisions2026 +2.9%; 2027 +3.7%Both are consensus EPS revisions over the one-month period in July.
• South Korea earnings revisions2026 +12.7%; 2027 +13.4%During the sharp share price decline, technology leaders still reported strong growth and positive guidance.
• Emerging market equity fund flows in July+USD 463 millionProvisional data as of July 29; ETFs saw inflows of USD 9.3 billion, while non-ETF funds saw outflows of USD 8.8 billion.
• Year-to-date inflows into emerging market equities+USD 54.1 billionDown 35% from the USD 83.3 billion peak at the end of April.
• Brent crude oil gain in July+23.6%It rose nearly 40% during the month due to escalating Middle East conflict.
• Precious metals performance in JulyGold +1.0%; silver -2.8%The possibility of earlier Fed rate hikes tilts gold risks to the downside.
• Industrial metals performance in JulyNickel +6.2%; copper +4.4%; aluminum +3.8%China high-frequency data point to copper and aluminum consumption remaining at high levels from June to July.

Impact & implications

If deleveraging in South Korean technology stocks has indeed ended, Asian technology assets may see a technical recovery, but sustained gains still require improvement in the outlook for AI capital expenditure, financing, and commercialization. High oil prices are relatively favorable for commodity exporters such as Brazil and Colombia, but may hurt inflation and corporate margins in Asian importers such as India. Earlier Fed rate hikes would tighten global financial conditions and could weigh on emerging market valuations, non-USD currencies, and gold. Although fund flows have improved marginally, the significant divergence between ETFs and non-ETF funds shows that investor confidence has not yet fully recovered.

Risks

• Middle East hostilities escalate again and push up energy prices through disruptions to transport in the Strait of Hormuz and the Red Sea.
• The Federal Reserve may raise rates earlier than the baseline forecast, and surprises in inflation or unemployment data would amplify policy risk.
• The sustainability of AI capital expenditure, financing, and commercialization capabilities fall short of expectations.
• Deleveraging in South Korean technology stocks has not truly ended, and leveraged products and hedge fund positioning may amplify volatility again.
• Active and non-ETF funds continue to see redemptions, with flow improvement overly dependent on ETFs.
• High oil prices intensify imported inflation and corporate margin pressure in Emerging Markets Asia.
• Brazil's election, elevated interest rates, and rising inflation expectations may end the recent rebound.

What to watch

• Whether the month-end rebound in South Korean technology stocks can continue, and whether foreign investors shift from net selling to increasing holdings.
• Capital expenditure, financing, commercialization progress, and management guidance from AI leaders.
• The probability of the Fed raising rates before December and U.S. inflation and employment data.
• Progress in U.S.-Iran negotiations, transport conditions in the Strait of Hormuz and the Red Sea, and Brent crude oil trends.
• Whether flows into ETFs and non-ETF funds within emerging market equity funds converge.
• Whether earnings upgrades in South Korea, Colombia, and Taiwan, China can continue, and whether downgrades in India, Turkey, and South Africa worsen.
• The pace of implementation and additional measures of China's more proactive fiscal policy.
• Downside risks for gold amid rising rate-hike expectations.