J.P. Morgan: With three major tailwinds, the emerging market rally is broadening from AI heavyweight stocks to non-tech sectors.

J.P. Morgan Global Markets Strategy published a strategy report on emerging market (EM) equities on November 11, titled with a question: "When We Talk About 'Broadening,' What Are We Talking About?" The answer has three layers: changes in the U.S. political landscape (a Democratic sweep in the midterm elections) cleared away the geopolitical risk premium weighing on EM; three mutually reinforcing tailwindsfalling oil prices, declining bond yields, and a weaker or stable dollaropened up simultaneously; and the real meaning of "broadening" is that the rally is spreading from a handful of AI heavyweight stocks to the non-tech parts of EM. **What exactly is "broadening" broadening** The report uses three charts to define the problem. Chart one: EM's year-to-date return contribution is highly concentrated in the top five stocksthe index is rising, but what's rising is a handful of names. Chart two: MSCI EM ex-IT's year-to-date performance is rather lackluster. Chart three: the trajectory of the EM equal-weighted index relative to MSCI EM, which the report calls "this year's second broadening trade." Connecting the three charts, the logic becomes clear: 2026's EM was a narrow rally driven by AI hardware, with Taiwan, South Korea, and mainland China IT propping up the index; once the AI trade wobbles, the index falls, but equal-weighted and small-cap names may actually outperform. This is the first layer of meaning of "broadening"not that EM as a whole rises more, but that gains spread from a few names to the rest. The second layer of meaning is in the valuation table. The report gives two sets of numbers: EM ex-IT earnings growth is expected at 24% and 11% for 2026 and 2027, versus 23% and 6.5% for developed markets ex-IT; yet EM ex-IT's 12-month forward P/E is only 10.5x, about one standard deviation below its historical average of 11.3x. The earnings gap has already reversed, while the valuation gap remains in place. **Tailwind one: oil prices, valid and verifiable** This is the only one of the three that has already fully materialized in the data. In late October, on concerns that the U.S. would escalate military action against Iran after the midterm elections, Brent briefly surged to about US$118/barrel. After the Democrats won both chambers, the geopolitical premium began to unwind: on November 9, Brent fell 5.85% in a single day to US$92.57, then dropped another 1.2% on November 10 to close at US$91.49, at one point falling below US$90 to about US$89.95 intraday, the lowest since August 31; WTI closed at US$86.04. The supply side is also cooperating. Surveys show OPEC output rose about 1.38 million barrels per day in October to 22.87 million barrels per day, with Saudi Arabia, Kuwait, and Iraq raising output in tandem; J.P. Morgan's own commodities team estimates that global oil supply exceeded consumption by about 1.4 million barrels per day in October, versus 1.1 million barrels per day in Septemberthese are precisely the figures used in the original report. The demand side runs the other way: the U.S. Energy Information Administration expects global oil consumption to fall from a record 104.4 million barrels per day in 2025 to 102.4 million barrels per day in 2026. The report derives the transmission chain from this: lower oil prices lower imported inflation reduced pressure on policy rates eased pressure on importer currencies improved earnings for consumer, retail, auto, and financial sectors in oil-importing markets. The markets the report names as beneficiaries are India, South Africa, China, and South Korea. The report also acknowledges this chain is not one-directional: for oil-exporting markets such as Latin America, it is a net negative; but it adds that oil exporters are likewise worried about inflation and high rates, so falling oil prices may not be entirely bad for them. Another variable written into the report is El Nio: the report says its intensity is unprecedented, with effects appearing 3 to 5 quarters after the peak, and Southeast Asia and Latin America are exposed. **Tailwind two: bond yields, but seemingly overturned the day the report was finalized** The report writes: after the Democratic sweep and the sharp drop in oil prices, U.S. long-end yields fell to multi-week lows, with U.K. and German long-end yields also declining in tandem last Thursday; the bond market is pricing in "a divided Congress bringing fiscal restraint and accelerating the end of Middle East tensions"; a divided Congress reduces the likelihood of large-scale tax cuts and heavy spending plans, and also provides more oversight over debt-ceiling discussions. The conclusion is that lower yields boost risk appetite, and EM equities may see renewed inflows. That passage was correct at the time it was written, but after October CPI came out the market switched to a different pricing regime: 10-year yields rose about 8 to 14 basis points in a single day, at one point touching 5.025%; 2-year yields rose 17 to 20 basis points to 4.74%4.755%; 30-year yields rose to 5.357%. CME data show an 84.2% probability of a 25-basis-point hike in December, with the probability of a 50-basis-point hike rising from about 1% to 11.8%13.6%. Fed Governor Waller, before the data release, voiced support for a December hike and said that if core CPI comes in at 0.3% or above, "a 50-basis-point hike should be considered"; Dallas Fed President Logan said at least two more 25-basis-point hikes are needed. This is a hiking cycle, not a cutting cycle. The report frames the risk to this tailwind as "the Fed hiking more than the market currently prices"what it worries about is not that cuts are too slow, but that hikes exceed expectations. And the 10-year yield is right now stuck at the line the report set: the report says "a 10-year yield below 5% could act as a pressure-release valve," and on November 10 it touched 5.025%, closing near 5%. **Tailwind three: the dollar, an option rather than a base case** The report handles the dollar far more cautiously than the first two tailwinds, a point worth flagging separately. Its argument is historical statistics: over the past 20 years, in periods when the broad nominal dollar depreciated by more than 5%, each 1% weakening of the dollar corresponded to a median gain of 3.4% in MSCI EM (USD-denominated); in those periods EM was the best-performing region globally; Peru, Brazil, Turkey, Hungary, the Czech Republic, Indonesia, and South Africamostly twin-deficit economiesposted median gains exceeding 25%; by sector, materials, industrials, financials, consumer discretionary, and real estate outperformed. The bank's stance is that even a stable or only mildly weaker dollar would be enough to drive EM, especially when EM fundamentals are improving. What its FX strategy team did this week was reduce overall FX exposurecutting some dollar longs as well as cyclical FXon the grounds that the AI-led equity selloff after the midterm elections is challenging the pillars of "American exceptionalism," and that in the coming days FX will follow equities rather than activity data. So the true weighting of the three tailwinds is: one already materialized (oil), one overturned by same-day data (yields), and one an option rather than a base case (the dollar). The report presents them side by side as "three mutually reinforcing" tailwindsa characterization stronger than the actual evidence. **What support is left for "broadening"** The two remaining supports are both outside the macro level. The first is flows. The report notes that in the two months before the Middle East conflict erupted (JanuaryFebruary 2026), foreign subscriptions to EM equity funds were at historic highs, and they have begun to recover in recent weeks. India is a verifiable sample: after unprecedented selling by foreign institutional investors (FIIs) during the year, about US$7.5 billion has flowed back since mid-October. The second is the return of active management. The logic: as the market becomes more discriminating, active managers can avoid overvalued sectors and concentration risk and target areas of sustained growth to generate alpha, thereby attracting more active allocations. This is more inference than evidencethe only support is a chart of EM active funds' 12-month performance relative to MSCI EM, with no forward-looking flow forecasts. **Four markets, four sets of logic** The report's "market implications" section proceeds region by region, with four independent sets of logic. China: may benefit from short covering and capital rotationChinese equities had previously served as a source of short funding for long-AI positions. The report argues Chinese equities offer diversification from the global AI trade, and that China's AI localization has its own trajectory and may be less dependent on U.S. AI capex. Its China strategy team believes there is 10%15% more rebound room as valuations recover from the trough, potentially extended further by additional policy stimulus. India: risk appetite is gradually improving. October performance rebounded, driven by its relative defensiveness against the global AI selloff and by Q3 earnings beats. With crude import dependence of about 85%90%, Middle East peace is a large-magnitude tailwind for ita smaller import bill, a steadier rupee, lower inflation, and thicker margins. South Africa: the report's top pick in CEEMEA, maintained overweight throughout the conflict. Two comparisons: South Africa and Brazil are both commodity exporters with high FX beta and similar MSCI EM weights (about 3%4%); South Africa's bond yields have fallen about 350 basis points since the June 2024 national election, yet its equity market has not meaningfully re-rated. Recent local elections improved the prospects of the governing coalition (DA); by sector, it prefers banks and gold stocks. Mexico: the report sees it as one of the biggest global beneficiaries of a U.S. "blue sweep"potentially milder tariffs and more substantive USMCA negotiations. The peso has already depreciated more than 10% over two months, and the central bank has ended its easing cycle, raising the threshold for further depreciation; foreign positioning is very low, making it an alternative vehicle for Latin American "broadening" (given Brazil's macro-political debate). AI: still bullish, but acknowledged as a "mid-cycle reset" The report has not given up on AI. Its three fundamental arguments deserve to be recorded in full: unit economics, scaling laws, and token demand growth all remain strong; even in a double-digit growth environment, valuations have corrected to levels implying "earnings are about to be revised down," which it considers unlikely to happen; and the typical cycle-peak signalsinventory buildup, shortening lead times, rapid capacity expansionare largely absent. On this basis, it characterizes the current pullback as "a mid-cycle reset and another deleveraging event within the AI super-cycle," more optimistic than the market's "end-of-cycle" pricing. The risk lies in the market standing on the sidelines. The new variable introduced by the midterm elections is the policy overhang on data-center construction: a blue sweep could cap the capex curve, but the bank's U.S. strategy team believes the buildout trajectory is intact, with the key risk being delay rather than cancellation, and with the focus shifting to more supportive jurisdictions. **Bottom line: in this arithmetic problem, the denominator is still in someone else's hands** Having taken this report apart, its real contribution is not the phrase "three tailwinds" but turning "broadening" from a narrative into a testable arithmetic problem: EM ex-IT earnings growth has already overtaken developed markets ex-IT, yet valuations remain one standard deviation below the historical average. This point depends on neither elections, nor oil prices, nor the dollarit is the only argument that stands independently under any macro scenario. But it also exposes its own vulnerability: the numerator (earnings) of this arithmetic problem is EM's own business, while the denominator (discount rate) is in the Fed's hands. The threshold the report itself set is "10-year below 5%," and on November 10 that threshold was touched; the risk it itself listed is "the Fed hiking more than the market prices," and that day the market's pricing had just switched from "whether to hike" to "how much to hike." So what really needs watching is not EM's earnings table but the December FOMC meeting. If the hike lands and the long end holds below 5%, "broadening" has the denominator it needs; if 50 basis points becomes reality and the 10-year rises above 5%, then the modest tailwind from oil prices will probably only offset the rise in financing coststhe report's first tailwind and second headwind cancel each other out, and all that's left is the single leg of valuation discount.