Emerging Markets' Stellar Run: Can the Momentum Hold in 2026?
For much of the past two decades, emerging markets (EMs) have often struggled to live up to their promise, despite offering the allure of superior growth compared to advanced economies. According to the IMF, emerging and developing economies have consistently outpaced rich nations in output growth this century, yet their stockmarkets delivered disappointing returns until recently. It took until 2021 for MSCI's EM index to reclaim its 2007 peak, only to plummet by over 40% shortly after. However, a dramatic turnaround is now underway, sparking renewed investor interest and raising a critical question: can this stellar run continue?
Recent Surge and Key Drivers
In 2025, the MSCI index tracking emerging markets soared by an impressive 34%, significantly outperforming its developed-markets counterpart, which rose by 21%. As 2026 begins, EMs have already gained another 9%, with currencies like the Mexican peso and Malaysian ringgit strengthening against the dollar. Local-currency EM bonds have also delivered returns that surpass risky high-yield debt from America or Europe. A major factor behind this resurgence is the weakening dollar. Since the late 1960s, each bear market for the greenback has coincided with roaring EM stocks. Currently, the dollar is only 11% below its 2025 high against rich-world peers, a mild dip compared to historical declines, suggesting potential for further gains if traders continue to sell dollars.
Beyond the "Sell America" Trade
While a weaker dollar benefits EMs by making dollar-denominated debts cheaper to service and boosting dollar-priced commodity exports, the bull case extends beyond just capital flowing out of America. Three compelling reasons support EM investment: cheap valuations, enhanced resilience, and growth potential. EM shares, though pricey relative to their own history at 13 times expected earnings, trade at a 40% discount to America's S&P 500 index. This allows investors to bet on trends like artificial intelligence through firms in China, South Korea, and Taiwan at a lower cost with greater diversification.
Moreover, EMs are far better equipped to handle economic shocks today. Countries across Latin America and Asia have strengthened institutions, built foreign-exchange reserves, and empowered central banks. Their resilience was evident in 2022 when many raised interest rates ahead of the Federal Reserve and European Central Bank, successfully curbing inflation. Although investing in EMs remains riskier than in advanced economies, the risk has diminished significantly over time.
Global Economic Backdrop and Future Outlook
The global economic environment appears ideal for emerging markets. The IMF forecasts steady global GDP growth in 2026, with EMs outpacing rich economies by 2.4 percentage points. With the Federal Reserve poised to cut interest rates further and no imminent recession fears, conditions are "not too hot and not too cold"—perfect for encouraging capital deployment in riskier, higher-return regions. Even if political factors, such as policies under America's President Donald Trump, provide more reasons to shun U.S. assets, EMs' bull run may only be in its early stages, offering a promising avenue for diversified portfolios.
