Emerging markets are experiencing their most significant financial comeback in over 15 years, fueled by a weakened US dollar, high relative yields, and renewed investor interest in local currency assets and equities.
Stock and Bond Indexes Reflect Strong Growth
As of Q3 2025:
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The MSCI Emerging Markets Stock Index is up 28 percent, marking the largest gain since 2009
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The JPMorgan Government Bond Index for EM local currencies has increased 16 percent, also the strongest rally since 2016
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By contrast, the MSCI Developed Markets Index rose less than 17 percent, signaling a major outperformance by developing economies
This turnaround follows a prolonged lost decade from 2010 to 2024, during which EM stocks underperformed significantly—rising just 9 percent over 15 years as US equities dominated.
A Weak Dollar Drives a New Investment Cycle
A major factor behind this rally is the decline of the US dollar. A weaker dollar eases financial pressure on emerging markets, making it cheaper to service foreign-denominated debt and boosting capital inflows. Recent US policies and the Federal Reserve’s pivot to interest rate cuts have accelerated this trend.
FX movements account for around half of the bond index returns in 2025, underlining the power of currency shifts in global capital flows.
Real Yields and Interest Rate Strategy Support Demand
Central banks in large EMs like Brazil and South Africa have kept rates elevated, attracting yield-seeking investors. Meanwhile, countries such as Turkey have maintained double-digit interest rates to protect against capital flight.
Even nations with lower interest environments—Thailand and Malaysia—remain attractive due to declining inflation, supporting bond investments at the local level.
As a result, government bond issuance in 17 major EMs excluding China has surged to a record 286 billion dollars in 2025, according to S&P Global Ratings.
AI and Tech Frenzy Reaches Emerging Economies
Investor enthusiasm for AI-related equities has spilled into emerging markets. Tech-heavy indices like Korea’s KOSPI and Taiwan’s TAIEX hit new record highs in recent weeks.
Driving this is Taiwan Semiconductor Manufacturing Company, now accounting for 11 percent of the MSCI EM benchmark—more than most entire countries. The demand for semiconductors, power management, and data infrastructure is making Asian EMs central to the AI revolution.
Valuation Gaps and Undervalued Assets
Despite the impressive growth, EM equities remain undervalued. The MSCI EM Index trades at 14 times forward earnings, compared to 23 times for the S&P 500.
This significant discount positions EM assets as attractive long-term investments, particularly as US markets face rising valuations and volatility. There is a substantial valuation gap between the US and the rest of the world that continues to support EM growth potential.
The Global Capital Shift Has Just Begun
While performance is strong, capital flows remain underweight in EM. Institutional investors are still cautious, leaving room for further inflows in the months ahead.
Some market observers suggest that the unpredictability and volatility of US policymaking are beginning to resemble traits usually associated with emerging markets. As developed economies become more uncertain, emerging markets are regaining attention as stable and rewarding investment destinations.