Emerging Markets – Early 2026 Gains Mask Weak Performance in India and Indonesia
Emerging Markets – Emerging market assets entered 2026 on a relatively firm footing, showing resilience even as global financial markets faced increased volatility. A recent report by Deutsche Bank highlighted that most emerging economies delivered solid returns in January, although India and Indonesia stood out as notable exceptions, underperforming their peers during the month.
Emerging market equities recorded strong gains at the start of the year, supported by improving investor confidence and favorable global conditions. The MSCI Emerging Markets index climbed more than 8 percent in January, reflecting widespread advances across regions and sectors. This broad-based strength signaled renewed risk appetite among global investors, particularly toward markets that had lagged in previous periods.
India and Indonesia Lag Broader Market Rally
Despite the overall positive trend, India and Indonesia were the only major emerging equity markets to post declines in January. According to the report, Indonesia faced heightened pressure following concerns related to governance standards and market liquidity. These issues intensified after MSCI raised the possibility that Indonesia could be reclassified from emerging market status to a frontier market, a move that could significantly impact capital flows.
India’s equity market also failed to participate in the broader rally. While the report did not point to a single trigger, India’s underperformance stood out against the strong gains seen across most other emerging economies, suggesting country-specific challenges and cautious investor positioning at the start of the year.
Strong Performers Reflect Improving Risk Appetite
In contrast, several emerging markets delivered standout performances. Peru, South Korea, and Turkiye emerged as top gainers in January, benefiting from renewed investor interest and a reassessment of portfolio allocations. The report noted that these markets saw a catch-up effect, as investors rotated into regions that had previously been underweighted.
Supportive global macroeconomic conditions played a key role in lifting these markets. Easing financial conditions and expectations of policy support in major economies encouraged investors to take on more risk, benefiting emerging markets with relatively stable fundamentals.
Emerging Market Assets Show Broad Resilience
The report emphasized that, despite rising volatility driven by geopolitical tensions, fiscal uncertainties, and evolving narratives around artificial intelligence and global growth, most emerging market asset classes remained resilient. Market fluctuations intensified toward the end of January, yet the overall performance trend remained constructive.
Emerging market hard currency sovereign bonds recorded modest gains, extending a positive run that has now lasted nine consecutive months. At the same time, local currency debt in emerging markets posted its sixth straight monthly gain. This performance was supported by currency strength and favorable carry returns, reinforcing investor confidence in the asset class.
Outlook Remains Supportive With Greater Market Divergence
Looking ahead, Deutsche Bank noted that emerging markets remain fundamentally well-positioned to benefit from a more supportive global policy environment. The easing of tariff-related pressures and relatively stable energy prices are expected to provide a favorable backdrop for many economies.
However, the report also cautioned that differentiation among emerging markets is likely to increase as the global policy easing cycle matures. As market volatility picked up toward the end of January, some of the early-year outperformers entered February facing the risk of position unwinding, suggesting that selectivity will become increasingly important for investors.
Overall, while emerging markets have begun 2026 on a strong note, the uneven performance across countries underscores the importance of local factors in shaping investment outcomes in the months ahead.