EMERGING MARKETS-EM stocks hit highest since 2021 in first session of New Year

By Niket Nishant

Jan 2 (Reuters) - Emerging market stocks hit a near five-year high in the first trading session of 2026 as a batch of data showed solid manufacturing activity, setting an upbeat tone for a year that faces a high hurdle to surpass 2025's stellar gains.

The MSCI emerging market stock index .MSCIEF rose 1.6%, while the corresponding currency gauge .MIEM00000CUS dipped 0.1%.

Investors are bracing for a slew of cross-currents in 2026, including hopes for continued weakness in the U.S. dollar and a maturing AI rally. While rate cuts by the Federal Reserve could weigh on the greenback and boost demand for emerging market assets, some analysts caution that investors may become selective about positioning.

Those seeking more upside in the AI theme may tilt toward clear beneficiaries such as Taiwan, South Korea and China.

Shares of Shanghai Biren Technology 6082.HK, a Chinese AI chip designer, more than doubled in their Hong Kong debut on Friday, highlighting appetite for AI-linked names.

Others still recommend rebalancing toward domestic-focused markets such as Brazil and India.

TARIFFS REMAIN IN FOCUS

Purchasing managers' indexes released by S&P Global on Friday showed factory activity in major tech-exporting economies South Korea and Taiwan snapping months of declines in December, while most Southeast Asian nations maintained brisk growth.

South Korean shares .KS11 were last up 2.3%, while Taiwanese equities .TWII jumped 1.3%. Both benchmarks hit record highs.

Trade and tariffs will remain front and centre in 2026 and could be pivotal to sentiment around Asia's export-driven economies.

In India, where a long-awaited trade deal with the U.S. has still not been announced, the rupee INR=IN traded in a narrow range on Friday. Traders said state-run banks were intervening to support the currency on behalf of the central bank.

The South Korean won KRW= slipped 0.2% against the dollar, even after authorities renewed their focus on stabilizing foreign exchange markets with measures to bolster the won.

In his New Year speech, Bank of Korea Governor Rhee Chang-yong warned that recent dollar-won levels did not accurately reflect the local economy's fundamentals, signalling the currency has been too weak.

FACTORY DATA DRIVES TONE

In Europe, the Czech crown EURCZK= and the Polish zloty EURPLN= fell 0.2% and 0.1% against the euro, respectively.

Poland's manufacturing sector contraction in December, as output and new orders declined at a faster pace, according to data from S&P Global.

Czech manufacturing activity, on the other hand, grew in December for only the second time since May 2022. The PX stock index .PX was hovering around a record high.

In Turkey, manufacturing activity in December shrank at a slower pace. Stocks .XU100 jumped 1.1% while the lira TRYTOM=D3 was 0.2% weaker against the dollar.

Trading volumes may normalise starting Monday as more investors return and China's equity market reopens after holidays.