Three things we are thinking about today:
- ͏͏͏͏Conflict in Iran: Operation Epic Fury and President Trump’s goal of regime change in Iran raises the risk of a sustained military campaign as opposed to a time limited, contained exchange. For markets, the escalation and disruption of energy and logistics infrastructure is resulting in a higher equity risk premium. The closure of the Straits of Hormuz is a concern and increases the risks to inflation, if closure is sustained. With selected emerging markets (EM) at all-time highs, a pull-back is likely inevitable, but a correction beyond 10% is dependent on how events unfold.
- US tariffs: China is the biggest beneficiary of the US Supreme Court’s decision to block President Trump’s use of the International Emergency Economic Powers Act to impose tariffs. The ruling invalidates the 10% fentanyl and 10% reciprocal tariffs imposed on China. Although Trump responded by imposing Section 122 tariffs, the US effective tariff rate declined to an estimated 14% from 16%1> and China’s effective tariff declined to 19% from 29%.2
- China National People's Congress (NPC): The annual NPC will commence on March 5. The primary focus for investors will likely be on tone from China’s top leadership. Specifically, whether policy doubles down on technology competition with the United States or emphasizes economic rebalancing and anti-involution. Attention will also focus on the 2026 GDP growth forecast, which may be cut to 4.5%-5% and the allocation of more than US$4 trillion in annual local and central government spending.
Exhibit 1: Security Emerged as Policy Focus Area in China’s 2021-2025 Plan
Source: Asia Society, National Development and Reform Commission.
Outlook
We see renewed interest—and optimism—in EM equities year-to-date, as shown by capital inflows and improving sentiment. In comparison to developed markets, EMs look relatively attractive and offer exposure to both domestic and external growth opportunities.
Several macroeconomic factors are contributing to this constructive outlook. Expectations for further US interest rate cuts and a potentially weaker US dollar are especially supportive, as EM assets historically benefit from easier global financial conditions and dollar softness. Earnings dynamics are also improving in parts of EMs. Domestic fundamentals have strengthened in recent years, providing economies with room to ease policy to support consumption.
Structural themes underpin the above, adding another dimension to the optimism we carry. Technology-heavy markets in Asia are benefiting from the global AI and semiconductor investment cycle, which has strengthened export demand and corporate profitability. Chinese industrial companies are benefitting from robust export demand to markets outside the United States, providing an offset to softer domestic dynamics.
Market review
EM equities rose in February 2026. Trade headlines re-entered the picture, with the US Supreme Court overturning tariffs imposed by Trump. For the month, the MSCI EM Index returned 5.51% while the MSCI World Index delivered a more moderate return of 0.76%.
Equities in the emerging Asia region advanced overall. Asia’s technology stocks saw chip-related names in South Korea and Taiwan jump, but major technology platforms in China were pressured. Indian equities gained, but performance was curtailed by software services firms, which declined amid concerns that AI could disrupt their business models. Equities in the emerging Europe, Middle East and Africa region achieved moderate gains. Equities in the emerging Latin America (LatAm) region also advanced, but performance was uneven across countries.
EndNotes
- Source: Editorial: Capitalize Budget.
- Source: BCA Research.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
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