BlackRock has revised its call on emerging market (EM) equities to an overweight recommendation on strong fundamentals and artificial intelligence (AI) scarcity.

Cheaper valuations and “exceptional” earnings growth provide support to the asset class, according to a recent note from the BlackRock Investment Institute.

“The headline EM rally masks very different sources of returns, but AI scarcity is one thread connecting them,” the note said.

“South Korea and Taiwan sit at the heart of semiconductor, memory and hardware supply chains. Latin America, including Brazil, offers exposure to the resources and physical infrastructure needed for the AI buildout.”

Taiwan and South Korea make up almost 50% of the MSCI Emerging Markets index while resource heavy markets such as Brazil, South Africa and the Middle East together account for 11%.

EM equities are on track to outpace the S&P 500 index again this year up 22.9% versus the S&P 500’s 12.2% after almost doubling its return in 2025.

As interest rates reset higher, the strategists at BlackRock argued that durability of earnings and the bar for risk-taking has increased but EM equities remain well placed.

“EM equities now offer another place where earnings can clear that higher hurdle,” they said in the note.

“We think AI-related investment can support growth and profits even as the same investment boom absorbs capital, power and other scarce resources.”

The upgrade to EM equities comes just a few months after BlackRock downgraded the asset class to neutral in June on the back of leverage concerns, particularly in Korea.

Since then, Korean stocks have experienced a sharp sell-off after a summer of deleveraging, which BlackRock said supports its return to overweight.

“The numbers reinforce the case for returning to EM equities,” the note said. “Consensus expects headline earnings per share for the MSCI Emerging Markets Index to grow over 34% over the next 12 months versus about 20% for the MSCI USA Index.”

“Yet EM equities trade at only 10 times forward earnings versus nearly 20 times for their US counterparts. That is a 50% discount, with the EM multiple in the bottom 10% of its 20-year history.”

US dollar tailwind, yield risks

A weaker US dollar could also ease financial conditions and boost local emerging market currencies, BlackRock added, although it doesn’t underpin its overweight stance.

“We see dollar weakness and stronger inflows as additional support rather than the foundation of our EM call,” the note said.

BlackRock said it does not have an outright “unqualified bullish call” due to the risks posed by long-end yields rising and renewed energy price pressures.

“Markets have absorbed the Middle East shock well, but Strait of Hormuz traffic remains severely constrained and scarcity has shifted downstream into refined products,” the note said.

“Renewed energy pressure could keep inflation elevated just as the Fed faces a difficult policy choice.”

The strategists warned that the Fed holding rates despite persistent inflation and a tight labor market could test its credibility and push long-term yields higher and raise the hurdle for equity returns.