Asian AI tech demand drive emerging-market stocks to longest winning streak in 21 years

Emerging-market stocks are on pace for their longest rally since 2003, fueled by heavy global investment into Asian tech companies.

According to data from Bloomberg, the MSCI equity benchmark tracking developing nations rose another 0.4% on Tuesday, pushing its monthly gain to 6.9% and notching a potential ninth consecutive monthly advance.

Hong Kong-listed heavyweights Alibaba Group, Tencent Holdings, and Taiwan Semiconductor Manufacturing Co. (TSMC) are driving most of the upside.

Foreign investors, still underweight on Chinese equities, have been piling into tech stocks tied to artificial intelligence. The sector’s rally has widened the valuation gap between Asian and U.S. firms.

That pricing gap has left plenty of room for continued inflows as traders chase AI-related growth outside the U.S. Currency markets across developing economies stayed mostly flat on the day, with the Hungarian forint leading modest gains against the dollar.

Investors appear to be watching developments in Washington, where a possible U.S. government shutdown is looming. But Wall Street doesn’t seem too spooked. Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, said in a note:

“We advise investors to look past shutdown fears and focus on other market drivers, such as the mix of continued Fed rate cuts, strong corporate earnings, and robust AI capex and monetization.”

Israel posts record equity gains as Trump-Netanyahu plan lands

In the Middle East, Israel’s TA-35 Index broke records after President Donald Trump and Prime Minister Benjamin Netanyahu jointly announced a 20-point strategy to end the war in Gaza.

That announcement, made Tuesday, sent Israeli stocks higher across the board, even as the shekel fell slightly, giving up some of Monday’s rally. Despite the war and broader regional instability, Israel’s market continues to outperform.

Three out of every four stocks on the TA-35 rose, with Teva Pharmaceutical Industries, Phoenix Financial Ltd., and Bank Hapoalim leading the gains. Trading volumes surged, coming in 47% above the 100-day average.

The index has now jumped 6.7% this quarter, its fifth straight quarterly advance. Since April, global investors have been rotating into Israeli assets, encouraged by a weaker dollar and uncertainty around U.S. policy.

With a diverse equity market covering tech, finance, and defense, Israel’s performance has remained strong in dollar terms, up 46% year-to-date, ranking 11th out of more than 90 global indexes tracked.

In contrast, Philippine markets saw deepening losses as corruption allegations against local government officials triggered foreign outflows.

Filipino stocks continued to fall Tuesday, with the peso also weakening as investor sentiment collapsed. That contrast highlights the split within emerging markets this quarter, with regional stories heavily influencing capital flows.

Small caps run hard but investors cash out fast

In the U.S., small-cap stocks have been rallying for weeks, but the gains haven’t been sticky. The Russell 2000 Index finally clawed back to an all-time high, four years after the last one, but investors don’t seem interested in sticking around.

More than $5.4 billion has been yanked from the iShares Russell 2000 ETF this year, despite the index pushing to fresh records.

Small caps got crushed in 2022’s bear market and failed to recover in sync with larger names. Unlike the Nasdaq 100, which surged roughly 50% over the same period due to AI hype, the Russell 2000 lagged, weighed down by firms that are often unprofitable and highly sensitive to interest rates.

But this month, optimism returned. Small caps clocked their longest weekly winning streak in almost five years, as traders began pricing in more Fed rate cuts and a stronger economic backdrop.

Still, anxiety lingers. From crypto to small caps to unprofitable tech stocks, stretched valuations are making investors nervous. Many are choosing to take profits early rather than risk another rug pull.

Back in Israel, the bullish wave extended into the bond market. The country’s dollar-denominated debt due March 2034 ranked among the top 20 performers in all emerging markets Tuesday, with at least 14 other Israeli bonds also gaining after London markets opened.

Meanwhile, Kuwait re-entered international bond markets for the first time in eight years, and Egypt issued a new sukuk benchmark, adding to the mix of activity across global credit markets.

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