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**34.5%** ex-China EM return in Q2; India absorbs **$14.2B** as allocators hedge AI concentration in Taiwan and Korea.
34.53%
in the second quarter of 2026
$280 billion
in market-cap expansion during the quarter
12.3%
returns in rupee terms as foreign institutional investors rotated
$14.2 billion
into Indian equities in May and June
The MSCI Emerging Markets ex-China Index returned 34.53% in the second quarter of 2026, among the strongest quarterly performances in the asset class's recorded history. The surge follows a decade-long period of chronic underperformance against developed-market equities and marks the second consecutive quarter of accelerating flows into ex-China vehicles. Lewis Kaufman, portfolio manager at Artisan Partners, noted in client correspondence that institutional allocators are treating the rebound as structural rather than cyclical.
The rally is concentrated in semiconductor and AI-linked equities across South Korea and Taiwan, where TSMC, Samsung Electronics, and SK Hynix have driven index-level gains. Taiwan Semiconductor alone accounted for approximately $280 billion in market-cap expansion during the quarter, while South Korea's KOSPI added 18.7%. India, which had lagged during the initial AI acceleration phase, posted 12.3% returns in rupee terms as foreign institutional investors rotated $14.2 billion into Indian equities in May and June. The shift reflects portfolio managers rebalancing sector concentration risk as Taiwan and South Korea weightings approached historical extremes.
The performance gap between emerging markets and the S&P 500 has narrowed to 6.8 percentage points year-to-date, the tightest spread since 2017. Flows into emerging-market equity funds totaled $41.3 billion in the second quarter, with $29.7 billion directed to ex-China strategies. The Schwab Emerging Markets Equity ETF and Global X Emerging Markets Ex-China ETF collectively absorbed $8.9 billion in net inflows during June alone, according to EPFR Global data. Allocators are treating India as a geographic counterweight to AI-sector crowding, with Reliance Industries, HDFC Bank, and Infosys receiving renewed attention from long-only funds that had avoided Indian equities during the 2023-2024 valuation expansion.
The re-emergence of India as a portfolio hedge carries second-order effects for single-family offices and institutional allocators. Indian equities trade at 22.4x forward earnings, a discount to the Nifty 50's five-year average of 24.1x, while Taiwan trades at 18.9x and South Korea at 11.2x. The valuation dispersion creates tactical entry points for allocators willing to underweight semiconductor exposure. India's domestic consumption theme remains intact, with credit growth at 15.8% year-over-year and infrastructure spending commitments totaling ₹11.1 trillion in the current fiscal year. The rupee has appreciated 3.2% against the dollar since March, reducing currency drag for unhedged investors.
Allocators should monitor three follow-on events. First, earnings guidance from TSMC and Samsung in mid-July will clarify whether AI capital expenditure sustains current run rates or decelerates into the second half. Second, India's monsoon season through September will determine agricultural output and rural consumption trajectories, which underpin 42% of domestic demand. Third, China's Politburo meeting in late July may signal fiscal stimulus measures that could shift flows back into mainland equities, altering the ex-China trade thesis. Fund managers at Artisan and others have positioned for continued outperformance through year-end, but the sustainability depends on whether Taiwan and South Korea can maintain earnings momentum without multiple compression.
The 34.53% quarterly return is a fact allocators will reconcile against the previous ten years of disappointment. Whether this marks a regime shift or another false breakout will clarify by September, when third-quarter earnings and monsoon data converge.
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For the principal
India offers geographic hedge against Taiwan and Korea AI crowding at 22.4x forward; monsoon data by September will confirm sustainability.
For the operator
Watch TSMC and Samsung guidance mid-July for CapEx trajectory; India flows could reverse if China signals fiscal stimulus late July.
For the house
Long India-weighted EM ex-China via targeted equity sleeves; hedge Taiwan semiconductor exposure ahead of third-quarter earnings season.
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