Emerging-market stocks, bonds and currencies are making a roaring start to 2026 as the dollar’s fall to a four-year low hastens a push by investors to diversify into markets beyond the US.
Bourses in Turkey, Brazil, South Africa, Chile, Mexico and Taiwan have gained at least 10 per cent in dollar terms this month, with Colombia and Korea up more than 20 per cent, as currencies and commodity prices have surged and investors have shifted bets on AI to Asia’s chipmakers.
The Brazilian real, Mexican peso, Chilean peso and South African rand are among the world’s best performing major currencies this year, gaining 5 to 6 per cent against the dollar when including returns from the relatively high interest rates in those countries.
“Fundamentals in emerging markets have been improving for a while but it took the weak dollar for global investors to pay attention,” said David Hauner, head of global emerging markets fixed-income strategy at Bank of America.
Many emerging-market central banks have boosted interest rates well above inflation in recent years in an attempt to retain capital that was being enticed away by the rise in US interest rates since 2022, which helped drive a decade-long strengthening in the dollar.
While such efforts had previously been overshadowed by US markets, said James Lord, global head of FX and emerging markets strategy at Morgan Stanley: “Now, [central bankers] are really reaping the rewards of [their] enhanced credibility as the dollar cycle has turned.”
An MSCI benchmark index of emerging market stocks is up nearly 11 per cent so far in January, after a 31 per cent gain last year that was its best performance since 2017. The value of stocks in the index has risen by more than a trillion dollars this year to $28tn, up from $21tn at the start of 2025.
In comparison, the MSCI World index of advanced economy stocks is up 2.8 per cent this year, while the S&P 500 index of US blue-chip stocks is up 1.6 per cent.
A recent Bank of America analysis of thousands of global “long-only” funds managing trillions of dollars found that last year they bought $109bn in shares in Asian markets outside Japan, and $59bn across other emerging markets, as they sold $160bn of US shares.
This year’s early gains include chipmaker stocks in Taiwan and Korea that have been key suppliers to US AI companies and now make up a large part of the emerging markets-wide benchmark. Elsewhere, MSCI’s bluechip South African index — mostly miners and banks — is up 15 per cent this year to a record high.
What these rallies had in common, said Archie Hart, equity portfolio manager at Ninety One, was that, “if you look at charts of the gold price, the silver price, and the [memory chip] price, they have all gone vertical”. Some spot prices for memory chips have almost quadrupled since October as AI demand has led to shortages.
“The positive overlay on that is obviously a weaker dollar,” given that emerging market equity performance had tended to be inversely correlated with the dollar for decades, Hart said. However, he noted, the dollar had still only weakened slightly from historically high levels. “If I look at the trade-weighted dollar over the last 25 years, about 75 per cent of the time it has been lower than it is now.”
Edward Evans, an emerging market equity portfolio manager at Ashmore Group, said stocks were being driven by more than the AI boom and dollar weakness, arguing that many companies in developing markets, such as fintech and ecommerce groups in Latin America, were “market leaders [that are] competitive globally”.
Fixed-income assets are also outperforming developed-world peers. A JPMorgan index of EM local currency bonds is up more than 2 per cent since the start of the year, following a 19 per cent return in 2025. Meanwhile, US high-yield bonds, which compete for a similar pool of investor capital, are up less than 1 per cent this month, according to an ICE Bank of America index.
Latin American bonds in the JPMorgan index have returned almost 6 per cent this year, most of which has been driven by currency moves.
Alper Gocer, head of emerging market debt at Pictet Asset Management, said fixed-income investors were not selling dollar assets to invest the proceeds in emerging markets, but were looking for options for new capital.
“Investors have started to look at diversification from, rather than escaping, the dollar,” he said. “Emerging markets, especially local currency debt, are one of the good alternatives.”
Local currency sovereign and corporate bond markets in developing nations have grown to almost $25tn, or close to the size of the US Treasury market. But global investor holdings of this debt in markets outside China largely stagnated over the past decade because of the dollar’s strength, before picking up over the past year.
Last week, investors added $1.5bn to funds investing in emerging market local currency bonds, according to fund monitor EPFR. This was the biggest weekly jump in allocations since 2018 — a further sign that interest in emerging markets is gaining momentum even after strong returns in 2025.
This week, the rally has shrugged off warnings that possible intervention to prop up the Japanese yen against the US dollar could hit so-called “carry trades”, in which investors borrow in currencies with low interest rates — such as the yen — to profit from higher yields in emerging markets.
“This isn’t just hedge funds doing carry trades in short-term FX markets — there is actual buying of emerging-market local currency bonds,” which is showing up in official balance of payments data this month, said Lord at Morgan Stanley.
The yen, which had been falling against the dollar since May last year, has jumped almost 3 per cent against the greenback since reports late last week that the US was contemplating co-ordinated intervention with Japan in the dollar/yen FX market.
“In the past, episodes of unwinding short positions in the yen would lead to positioning reductions across carry trades, hurting emerging market assets in the process,” Barclays analysts said. This year, they noted, this has not happened.
“The confidence shock on the dollar is triggering a long overdue strategic catch-up in emerging-market local currency allocations,” they said, adding that this could fuel further demand.
