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Emerging market stocks have recorded their strongest rally since 2009 as a falling U.S. dollar and cheap valuations attract investors back to developing countries.
An MSCI benchmark tracking these stocks has surged 28% so far this year, which is its biggest gain in over 15 years, according to the Financial Times.
At the same time, a JPMorgan index of government bonds issued in local currencies by developing nations has climbed 16%, reflecting a strong comeback from what investors called a “lost decade” dominated by U.S. markets.
By contrast, developed market stocks tracked by MSCI have risen less than 17% this year. Between 2010 and 2024, emerging market stocks gained less than 9% in total, a poor result compared with one of the longest U.S. bull runs in history. A post‑2001 rally in these markets collapsed into cycles of boom and bust, leaving investors cautious.
Now, a change in global conditions, especially the dollar’s decline, is being cited as the main driver of the turnaround. “After 15 years of very mediocre performance, the stars are finally aligning, and the most important variable there is the dollar,” said Ian Simmons, senior portfolio manager at Fiera Capital. “Whether it is by design or accident, [US President Donald] Trump does seem to have engineered a weaker dollar.”
Dollar weakens and local bonds rise
A weaker dollar usually eases financial pressure on developing countries by reducing the cost of servicing dollar‑denominated debt. The Federal Reserve’s move to cut U.S. interest rates has also boosted dollar‑funded bets on local currency bonds, which still offer high yields after inflation.
Damien Buchet, chief investment officer of Principal Finisterre, said about half of this year’s return in JPMorgan’s domestic bond index was due to foreign exchange moves. “Central banks are in easing mode and the dollar remains on a weakening trend,” he said.
Real yields remain high because larger emerging economies like Brazil and South Africa have been cautious about cutting interest rates this year. Countries with weaker balance sheets, such as Turkey, have kept rates in double digits to attract foreign capital.
Even in Asian economies like Thailand and Malaysia, which have lower interest rates, falling inflation has kept domestic bonds attractive for local investors.
The rally in local currency bonds is the strongest since 2016 despite a new debt crisis brewing in Argentina, a country once considered a classic emerging market trade but now far from most global investors’ radar.
Across 17 major emerging markets outside China, governments have issued a record $286 billion of local currency bonds this year to meet strong demand for high yields.
AI bets drive equity surge across Asia
Equity investors are also pouring into emerging markets linked to the global boom in artificial intelligence. These markets dominate chip production, and investors are ignoring warnings that AI demand may not match the surge in investment.
Korea’s Kospi index and Taiwan’s Taiex both hit record highs in recent days as funds moved into makers of chips, power equipment, and other products essential for AI data centers.
The market value of Taiwan Semiconductor Manufacturing Company has grown so much that its shares now account for about 11% of the MSCI benchmark, more than the stocks of most other countries combined.
Much of this year’s gains in emerging market stocks come from “re‑rating,” where valuations rise as the price‑to‑projected‑earnings ratio increases. On this measure, these stocks remain cheap compared with U.S. equities.
Shares in the MSCI benchmark are priced at around 14 times forecast earnings for the next year, compared with about 23 times for the S&P 500. “What has driven emerging‑market performance year to date is re‑rating, there is a big valuation gap between the US and the rest of the world. That gap is still substantial because US equities have been very expensive for a long time,” said Vivian Lin Thurston, portfolio manager at William Blair.
Indian stocks have been an outlier, lagging the rally because their prices had already reached near U.S. levels just as corporate earnings fell short of forecasts. Despite the powerful gains across other emerging markets this year, investors said flows into EM stocks and bonds remain behind the rally. “It’s currently very underowned and underallocated,” Simmons said.
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