Emerging markets hit record highs while India and China lag

Emerging market indices have hit record highs as global risk appetite has rotated into EM equities, buoyed by AI-chip enthusiasm and benign Fed expectations. South Korea's KOSPI surged 5 percent on semiconductor optimism; JPMorgan raised targets across several EM names. However, the rally masks sharp divergence: India's Nifty 50, Bank Nifty, and Sensex are down 1 to 1.2 percent amid oil and Iran concerns, while China faces imported inflationThe rate at which prices rise across an economy. pressure and reserve-draining dynamics as the Hormuz closure disrupts energy supplies. India is contemplating emergency measures including gold import curbs and fuel price hikes to stabilize foreign exchange, signaling acute stress.

The K-shaped recovery narrative is dominant: nations with exposure to AI capex and tech supply chains are winning, while energy-dependent importers face margin squeeze. South Korea's dominance in memory chips has made it a beneficiary of the semiconductor capex cycle, though labor negotiations with Samsung add binary risk. India's diversified economy and IT services sector should theoretically benefit from AI spending, but higher oil prices and current account pressures are offsetting gains. China's private refiners have sought approval to cut processing rates after being ordered to produce at any cost just weeks earlier, suggesting policy confusion and demand weakness.

Central bank policies are diverging sharply. India is considering capital controls and price hikes; China's central bank warned of imported inflationThe rate at which prices rise across an economy. risks. These moves contrast with the BoE's Megan Greene perspective that central banks lack adequate tools for supply shocks. The risk is that EM central banks, constrained by dollar weakness and capital flight risk, tighten prematurely, crushing growth while inflation remains elevated. A peace breakthrough in Iran could ease pressure and allow EM equities to rerate higher; failure would deepen divergence as dollar havens attract capital.