Emerging Markets Poised for Big 2026

Emerging markets are set to start 2026 as a favored trade, with money managers betting on a multi-year cycle of investment inflows. This year's capital rush into the sector has been the best since 2009, with emerging stocks outperforming US peers and bond yields shrinking to the lowest in 11 years.

Shift in Global Investment Flows

Portfolio managers are keen to diversify from the US, while also drawn to developing nations' progress in cutting debt and taming inflation. This shift has led to enthusiasm for the sector, with 300 investors and 170 meetings at a recent investment conference in London showing hardly any pessimism on emerging markets.

Turnaround in Emerging Markets

Until recently, investors were avoiding the asset class due to weak returns and fears of a US trade war. However, with the best profits since 2009 from carry trade strategies, emerging markets are now seen as a viable investment option. 2025 was an inflection point, with the question of whether emerging markets were investable no longer a concern.

More Upside Expected

Banks such as JPMorgan Chase & Co and Morgan Stanley are bullish on emerging markets, predicting benefits from dollar weakness and investment in artificial intelligence. $50 billion of inflows into emerging-debt funds are expected next year, with local-currency bonds and dollar-denominated emerging debt seen as attractive options.

• Emerging debt funds have taken in over $60 billion, despite outflows of $142 billion in the previous three years.
• Emerging markets remain under-represented in global portfolios, with 13% weight in the Bloomberg World Large & Mid Cap Index.
• Investors are finally re-engaging with emerging markets, with scope to move towards a more meaningful overweight.

Challenges Ahead

The biggest test for emerging markets lies in the dollar, with its 8% slide this year helping to buoy emerging assets. However, a potential rebound in the dollar could pose a challenge, with Citigroup Inc. strategists advising clients to buy only emerging assets that can withstand a potential greenback bounce.

Despite this, $4 billion of inflows into emerging-debt funds in the week to Dec. 17 show that investors are still keen on the asset class. With emerging markets poised for a big 2026, cautious investors may become convinced that a structural re-allocation is indeed underway.