For much of the past 20 years emerging markets (EMs) have seemed doomed never to emerge. The world’s up-and-coming economies were supposed to offer daredevil investors a shot at outsize returns: the chance to profit from the superior growth of middle-income countries as they caught up with rich ones. Sure enough, the IMF reckons that emerging and developing economies, on average, have increased their output faster than advanced ones every year this century, often by several percentage points. Yet after a terrific boom in the 2000s their stockmarkets had, until recently, generated lousy returns. It took until 2021 for MSCI’s index of EM shares to regain its peak from 2007—only quickly to crater again, by over 40%.
Now EM stocks are soaring once more. The MSCI index that tracks them rose by 34% in 2025, compared with 21% for its developed-markets equivalent. With this year barely a month old, EMs are already up by another 9%. Currencies from the Mexican peso to the Malaysian ringgit have surged against the dollar. The returns of local-currency EM bonds have trounced those of risky “high-yield” American or European debt. Can the stellar run continue?
A big part of the answer depends on what happens next with the dollar. Since the late 1960s, when the Bretton Woods system of fixed exchange rates began to fall apart, the greenback has been through four major bear markets. Each time, note analysts at Bank of America, EM stocks have roared. Their recent success has come as, once again, the currency’s strength has waned. So far, measured against a basket of rich-world peers, it is only 11% below its high point of 2025—a mild dip compared with a fall of 41% between 2002 and 2008.
If traders carry on dumping dollars, EM assets have much more to gain. Though the governments of emerging economies increasingly borrow in their own currencies, especially in Asia, plenty still have hefty dollar-denominated debts. A weaker greenback makes those cheaper to service and repay. All else equal, it should also give a boost to international trade priced in dollars, such as commodity exports. And capital flowing out of America has to flow somewhere. The average portfolio allocation to EM stocks of active fund managers is close to its lowest in two decades, making such assets an obvious choice for those looking to diversify.
Yet the bull case for EMs does not rest solely on the “sell America” trade continuing. To see why, consider three reasons for even the most ardent America First investor to give them a look: the stocks’ cheapness, their resilience and their potential to benefit from global growth.
Cheapness is the most obvious draw. True, EM shares look pricey compared with their own history: at 13 times expected underlying earnings for the coming year, they have rarely been dearer. This valuation nevertheless represents a 40% discount to that of America’s S&P 500 index. America’s tech giants might well mint extraordinary profits from artificial intelligence, but so too will firms in China, South Korea and Taiwan. Investors buying a broad basket of EM stocks can bet on the same trend for a far lower price—and with more diversification in case AI disappoints.
What is more, in the event that a shock knocks the world economy off-kilter, EMs are far better placed than they once were to cope with it. Middle-income countries across Latin America and Asia have spent decades building stronger institutions, amassing foreign-exchange reserves and empowering their central banks. Their resilience was on full display when prices surged globally in 2022 and many raised rates well ahead of the Federal Reserve and the European Central Bank, successfully reducing inflation. Investing in EMs remains riskier than betting on advanced economies, but much less so than it used to be.
In fact, the global economic backdrop looks about as close to EMs’ sweet spot as it could be. The IMF forecasts global GDP to rise steadily in 2026, albeit more slowly, with EMs outpacing rich economies by 2.4 percentage points. America’s Federal Reserve is poised to cut interest rates further, but few fear a recession. In other words, things look not too hot and not too cold: ideal for encouraging investors to deploy capital in places that are a bit riskier but that will probably grow a bit faster and generate higher returns. It would certainly help if Donald Trump, America’s president, gave investors yet more reasons to shun American assets—but regardless, EMs’ bull run may only be beginning.
