The advance was largely driven by a concentrated rally in technology-heavy Asian markets, where artificial intelligence (AI)-related capital expenditure and semiconductor demand provided strong tailwinds. At a sector level, Information Technology was the dominant performer, while Energy and Consumer Staples lagged the broader rally.  

South Korea was the standout performer across the EM universe, with the market delivering an exceptional return of 35.3% for the month. Gains were driven primarily by a sharp re-rating of memory-related stocks, whose fortunes remain tightly correlated with global demand for AI infrastructure. The continued build-out of data centre investment by cloud service providers (CSPs), combined with supply-side tightness across the semiconductor industry, created a supportive environment for Korean technology exporters. On the macroeconomic front, the Bank of Korea revised its 2026 GDP growth forecast upward to 2.6%. Inflation forecasts were also revised higher, to 2.7% for 2026 and 2.3% for 2027, reflecting a stronger demand environment. 

Taiwan equities were another key driver of EM returns, with the MSCI Taiwan Index reaching all-time highs during the month, posting a gain of 16.5%. Performance was supported by strong first-quarter earnings from technology companies across the export-oriented supply chain, which benefited directly from robust and sustained demand emanating from US-based CSPs. Upward revisions to capital expenditure guidance from these hyperscalers provided a positive catalyst for Taiwanese hardware manufacturers and their component suppliers. 

Taiwan’s economy, being heavily exposed to global technology trade flows, remains well-positioned to benefit from the ongoing AI hardware investment cycle. Improving investor sentiment, combined with solid fundamental delivery, supported the market’s re-rating to new highs. 

Chinese and Hong Kong equities declined by 3.0% and 1.1% respectively in May, diverging sharply from the broader EM rally. Markets faced a combination of headwinds: mixed economic data that continued to dampen confidence in the pace of domestic recovery, internet and platform stocks that remained under pressure following the introduction of new regulations affecting cross-border trading activity, and China’s comparatively limited direct exposure to the AI-driven hardware cycle meant it did not benefit to the same degree as its north Asian peers. 

There were, however, some pockets of relative strength, particularly among domestic semiconductor companies, where signs of incremental progress in narrowing the technology gap with global leaders provided some support. On the policy side, the Chinese government announced reforms to the hukou (household registration) system, shifting eligibility for public services such as education, healthcare, and social insurance to be based on actual place of residence rather than registration status. The move is intended to enhance labour mobility and support domestic consumption over time. 

Indian equities modestly underperformed the broader EM benchmark, declining 0.6% during the month. The market continued to be weighed down by twin pressures from elevated energy import costs, which represent a structural vulnerability given India’s substantial oil import dependence, and geopolitical tensions that contributed to a more cautious investor posture. While headline consumer price inflation (CPI) remained relatively contained in May, the Wholesale Price Index (WPI) rebounded sharply, introducing uncertainty around the inflation outlook. 

Indonesia was the weakest market in EM, declining 12.9%, a notably severe drawdown that reflected a convergence of idiosyncratic and structural pressures. MSCI’s removal of six Indonesian companies from its index triggered immediate mechanical selling from passive funds tracking the benchmark, while simultaneously reducing Indonesia’s overall country weighting. This reweighting effect amplified foreign institutional outflows that were already elevated ahead of MSCI’s scheduled semi-annual market review in June. Adding to the pressure, Bank Indonesia delivered an above-consensus 50 basis points interest rate increase in an attempt to defend the Indonesian Rupiah (IDR), which had come under meaningful depreciation pressure. Investor concern about the broader economic impact of the ongoing Iran conflict further weighed on sentiment. Higher energy prices compounded the challenge, given Indonesia’s vulnerability as an energy importer across key sectors. 

The Latin American region broadly underperformed. Brazil was one of the worst performers in EM after a high-profile corruption scandal involving a presidential candidate injected political uncertainty, while broader inflation concerns reduced the likelihood of near-term rate cuts. Peru was the regional exception, gaining 11.9% ahead of a June presidential election runoff. Mexico returned 3.6% but underperformed the broader EM index as judicial reform was delayed and the central bank trimmed its 2026 growth forecast to 1.1%. 

Elsewhere, Greece outperformed supported by a first-quarter budget surplus that exceeded forecasts. Poland gained 7.2%, benefiting from its strategic NATO positioning, while Turkey was a significant laggard (-8.4%) after a court ruling reinstating a former opposition party leader raised concerns about institutional independence. Saudi Arabia declined modestly as Vision 2030 megaprojects, including NEOM, were scaled back due to funding constraints and weaker FDI inflows. The UAE also underperformed, while South Africa returned a modest 2.4% amid softer commodity prices and a policy rate increase to 7.0%.