Emerging Markets Surge to Record High on Artificial Intelligence and Iran's Offer to Ease Hormuz Tensions

Emerging-Market Equities Reach Record High Amid AI Trade Optimism and Iran Proposal

Emerging-market equities surged to a record high on Monday, driven by optimism over the artificial intelligence trade and a report that Iran offered a new proposal to reopen the Strait of Hormuz. The MSCI EM Index rose as much as 1.7% on Monday, surpassing the previous peak in February. This rally is a significant development, as easing Middle East tensions have bolstered sentiment thanks to an extended US-Iran ceasefire, while a developing-market currency gauge rose around 0.3%.

The rally underscores a market being propelled by structural forces rather than short-term news flow. This is according to portfolio managers who expect the MSCI EM to grind higher into year-end, led by strong earnings momentum from AI beneficiaries alongside sustained investment in energy, infrastructure, and defense. Emerging-market stocks have staged a stunning recovery after sliding more than 10% following the outbreak of the Iran war.

Gains in Asian shares, which comprise at least 76% of the index, have powered the rebound as investors rotated back into AI stocks. Benchmarks in South Korea and Taiwan also hit records on Monday. However, the rally has renewed concerns about concentration risk, with much of the gains driven by tech. Some warn that the conflict may not be over completely, and the economic fallout not yet felt, even if markets are increasingly pricing it that way.

Read also: SpaceX Seeks Record $75 Billion IPO, Potentially Positioning Elon Musk as the World's First Trillionaire

Forward earnings estimates for the MSCI Emerging Markets Index have been lifted by about 30% this year, driven by the AI-heavy markets of South Korea and Taiwan, compared with 12% for the MSCI World Index. Despite strong headline performance, worries persist about concentration risk. Fund managers are positioned for a continuing rally, but getting worried by the fast-rising expectations, especially in tech.

In the very near term, momentum is strong and with China usually enjoying strong seasonality in the second quarter, EM equities can outperform if earnings deliver. However, with oil prices remaining high, the focus will likely shift back to concerns around overall economic growth in the medium-long term.