Emerging Markets Just Posted Their Best January Since 2012, Crushing US Stocks by the Widest Margin in Years

For more than a decade, the trade was simple: buy American stocks, ignore everything else. The S&P 500 delivered annualized returns that left the rest of the world in the dust, powered by the dominance of Big Tech, the strength of the U.S. dollar, and the gravitational pull of the deepest and most liquid equity market on the planet. Emerging markets, by contrast, were the perennial underperformers, a graveyard of broken narratives about the "next decade" belonging to China, India, or Brazil.

January 2026 may have changed the script. The MSCI Emerging Markets index surged nearly 9% during the month, its best January performance since 2012 and one of its strongest monthly gains in recent years. Developed market stocks, as measured by the MSCI World Index, gained a comparatively modest 2.2%. The roughly seven-percentage-point gap between emerging and developed markets was the widest for any January in over a decade.

What Drove the Rally

The emerging markets surge was not driven by a single country or theme. Instead, it reflected a broad-based reassessment of value, risk, and opportunity across the developing world, catalyzed by several converging forces.

South Korean equities led the charge, rallying more than 20% in January alone. The move was fueled by optimism around Samsung's artificial intelligence chip business, a weakening won that boosted export competitiveness, and political stabilization following months of domestic uncertainty. South Korea's KOSPI index had been one of the worst performers globally in 2025, creating a deep value pocket that attracted aggressive buying from both domestic institutions and foreign investors.

Taiwan also posted strong gains, driven by the continued surge in demand for advanced semiconductors. Taiwan Semiconductor Manufacturing Company, which alone accounts for roughly 8% of the MSCI Emerging Markets index, rallied on the back of record AI chip orders and strong guidance from its major customers.

"2025's outperformance was led by tech and the AI theme. While emerging market stock strength has broadened out, dispersion and the impact of mega forces like AI are still evident. But what's different now is that the breadth is real. This is not a one-country story."

BlackRock Investment Institute, Weekly Commentary, February 2026

The U.S. Dollar Tailwind

One of the most powerful forces behind the emerging markets rally has been the weakening U.S. dollar. After years of relentless strength that crushed returns for dollar-based investors in foreign assets, the greenback has fallen to a four-year low against a basket of major currencies. The Dollar Index, which tracks the dollar against six trading partners, declined roughly 4% in January, its sharpest monthly drop since 2023.

A weaker dollar is rocket fuel for emerging markets. It reduces the burden of dollar-denominated debt carried by developing country governments and corporations. It makes commodity exports, which are priced in dollars, more valuable in local currency terms. And it mechanically boosts the returns that U.S. investors earn on foreign holdings when translated back into a depreciating dollar.

The dollar's decline has been driven by a combination of factors: the Federal Reserve's expected rate cuts later this year, the massive U.S. fiscal deficit that has raised questions about long-term dollar sustainability, and the deliberate policy choices of countries like China that are diversifying their reserve holdings away from U.S. Treasuries.

Valuation: The Most Compelling Case in a Decade

Perhaps the most fundamental argument for emerging markets is simply price. After years of underperformance, the MSCI Emerging Markets index trades at roughly 12 times forward earnings, a steep discount to the S&P 500's 21 times and well below its own historical average. The price-to-book ratio for emerging market equities is near its lowest level relative to developed markets in over 20 years.

That valuation gap has widened to a point where even modest improvement in earnings growth or sentiment can generate outsized returns. And that is precisely what happened in January. Earnings revisions for emerging market companies turned positive for the first time in over a year, driven by strength in technology, financials, and materials.

Country-Level Highlights

Beyond South Korea and Taiwan, several other markets contributed meaningfully to the January rally. Brazil's Bovespa index gained 6.5%, supported by commodity price strength and expectations that the central bank would begin easing monetary policy in the second quarter. Mexico posted solid gains as trade deal optimism with the United States improved sentiment toward the country's manufacturing sector.

India, which had been one of the best-performing major markets in 2024 and 2025, was a relative laggard in January despite the recent U.S.-India trade deal that reduced tariffs to 18%. The market's premium valuation, with the Nifty 50 trading at over 20 times forward earnings, left limited room for multiple expansion even as the fundamental story remained compelling. First-time international bookings for Indian travel destinations were surging, and the country's digital economy continued to attract record foreign investment.

China, the elephant in the emerging markets room, posted moderate gains but remained polarizing. Beijing's recent fiscal stimulus measures and property market stabilization efforts provided some support, but foreign investors remained cautious given the country's demographic headwinds, regulatory unpredictability, and ongoing trade tensions with Washington.

Is This the Start of a Rotation?

The critical question for investors is whether January's outperformance marks the beginning of a sustained rotation or was simply a one-month anomaly driven by positioning and dollar weakness.

History offers some encouragement for the bulls. Major turning points in the emerging-versus-developed-markets cycle have typically been preceded by exactly the kind of extreme valuation divergence that exists today. The last great emerging markets rally, from 2003 to 2007, began when the valuation gap was similarly stretched, the dollar was weakening, and commodity prices were rising. All three conditions are present today.

The bears argue that the structural advantages that powered U.S. stock market dominance, the technology sector's moat, the rule of law, and the depth of American capital markets, have not disappeared. They point out that previous false dawns for emerging markets, notably in 2017 and 2020, were followed by resumed U.S. outperformance.

What Investors Should Consider

For U.S. investors who have spent the past decade with minimal international exposure, the January data is worth taking seriously. Portfolio allocation models from major firms including BlackRock, JPMorgan, and Vanguard have been gradually increasing their recommended emerging market weightings, citing the combination of attractive valuations, dollar weakness, and improving earnings momentum.

The most accessible way to gain broad emerging market exposure is through index funds tracking the MSCI Emerging Markets index, which provides diversified access across more than 20 countries. For those willing to take more concentrated bets, country-specific ETFs for South Korea, Taiwan, India, and Brazil offer targeted exposure to the markets showing the strongest momentum.

One January does not make a trend. But when the valuation case, the currency backdrop, and the earnings momentum all align for the first time in years, prudent investors take notice. The rest of the world may finally be ready to give American stocks a run for their money.