Emerging market assets are enjoying their strongest start to a year in recent memory, with the MSCI Emerging Markets Index heading for a fifth consecutive weekly gain—its longest winning streak since May. The rally underscores a significant shift in global investor sentiment, as capital flows away from expensive U.S. mega-caps toward more attractively valued opportunities in developing economies.

The Numbers Tell the Story

The emerging markets rally has been broad-based across both equities and currencies:

  • MSCI Emerging Markets Index: On pace for its strongest annual return since 2017
  • EM currencies: The MSCI EM Currency Index has recovered losses, holding steady as the dollar slips
  • Regional standouts: Colombia and Brazil currencies leading gains, shrugging off early-session weakness
  • 2025 performance: International stocks soared 31% last year, with emerging markets significantly outperforming developed market peers

The Dollar Weakness Tailwind

A key driver of emerging market outperformance has been the U.S. dollar's decline. The greenback fell 9.4% in 2025 against a basket of major currencies, and weakness has persisted into 2026. This provides multiple benefits for emerging market assets:

  • Commodity boost: Many emerging markets are commodity exporters, and dollar weakness typically supports raw material prices
  • Debt relief: Countries and companies with dollar-denominated debt see reduced repayment burdens
  • Capital flows: A weak dollar encourages investors to seek higher returns outside the U.S.
  • Competitiveness: Local exporters become more competitive when their currencies cheapen relative to the dollar

"When it comes to the Fed, they will either keep rates unchanged or cut in early 2026. Any kind of dollar strength we get is going to be quite bounded, whereas the dollar weakness could be more open on the downside."

— Goldman Sachs emerging markets research

The AI Connection

The artificial intelligence revolution, often viewed as primarily benefiting U.S. tech giants, is increasingly providing lift to emerging market leaders. Several EM companies sit at critical points in the AI supply chain:

Taiwan's TSMC: The world's dominant advanced chip manufacturer, producing processors for Nvidia, Apple, and virtually every AI leader. TSMC's stock has surged as AI chip demand explodes.

South Korea's SK Hynix: A leader in high-bandwidth memory chips essential for AI servers. The company has seen order books swell as data center construction accelerates globally.

Chinese tech: Despite geopolitical tensions, Chinese technology companies are developing their own AI capabilities and benefiting from the broader chip demand boom.

Valuation Advantage

After years of U.S. exceptionalism that pushed American equity valuations to historic extremes, emerging markets offer a compelling value proposition:

  • P/E discount: Emerging markets trade at roughly 40% discount to developed markets on forward earnings
  • U.S. valuations stretched: The Shiller CAPE ratio for the S&P 500 sits near all-time highs above 40
  • Earnings growth competitive: EM companies offer earnings growth rates comparable to developed markets at lower valuations

Goldman Sachs' Bullish Call

Goldman Sachs has emerged as one of the most vocal proponents of emerging market equities. The bank forecasts emerging markets will rise about 13% in price terms for 2026, with total returns approaching 16% when including dividends.

Key tailwinds identified by Goldman:

  • China export resilience: Despite tariff concerns, Chinese exports have held up better than expected
  • Commodity price stability: Falling commodity prices have actually benefited many EM economies that are net importers
  • Rate cuts globally: Many EM central banks have room to cut rates, supporting local growth
  • AI infrastructure demand: Technology hardware supply chains concentrated in Asia benefit from the AI buildout

Regional Spotlight: Latin America

Latin American markets have been particular beneficiaries of the risk-on environment. Brazil's markets surged dramatically during 2025 as the EU-Mercosur trade deal created new opportunities for the region.

Key Latin American dynamics:

  • Brazil: Benefits from agricultural exports, commodity exposure, and improving fiscal situation
  • Mexico: Near-shoring trends as companies diversify supply chains from China
  • Colombia: Currency strength reflects improved investor confidence in economic management

The U.S. Outperformance Fade

The rally in emerging markets comes as U.S. stocks have struggled to extend recent gains. Several of the "Magnificent Seven" technology stocks are trading well below their 2025 highs:

  • Meta Platforms: Down more than 17% from its 52-week high
  • Microsoft: Off 16% from its peak
  • Apple: Lower by 14%
  • Tesla: Almost 10% below its high

This rotation out of mega-cap U.S. tech has freed capital to flow toward international opportunities, benefiting both developed market international stocks and emerging markets.

Risks to Monitor

While the emerging markets rally has momentum, several risks could derail the trend:

  • Dollar reversal: Any sustained dollar strength would pressure EM assets
  • Tariff escalation: Trade war intensification could particularly hurt export-dependent economies
  • China slowdown: Deeper Chinese economic weakness would ripple through EM commodity exporters
  • Geopolitical shocks: Regional conflicts or political instability could trigger risk-off moves
  • Fed policy surprise: Unexpectedly hawkish Fed commentary could strengthen the dollar and hurt EM

How to Play the EM Rally

For investors looking to increase emerging market exposure, several approaches exist:

Broad EM equity funds: ETFs tracking the MSCI Emerging Markets Index provide diversified exposure across countries and sectors.

Country-specific plays: Investors with higher conviction can target specific markets like Taiwan (tech-heavy), India (domestic growth story), or Brazil (commodity and agricultural exposure).

EM bonds: Local currency emerging market debt offers attractive yields and potential currency appreciation.

EM-exposed U.S. companies: Some U.S. multinationals derive significant revenue from emerging markets, providing EM exposure without leaving domestic markets.

The 2026 Outlook

Looking ahead, emerging markets enter 2026 with significant tailwinds. Lower global rates, a softer dollar, structural AI and supply chain developments, and relatively attractive valuations create a constructive backdrop.

Goldman Sachs' projection of 13-16% returns would represent another strong year, though somewhat below 2025's exceptional performance. Perhaps more importantly, the rotation toward EM suggests we may be in the early innings of a multi-year shift in global capital flows—one that could see emerging markets finally capture a larger share of global investment portfolios.

For investors who have spent years watching U.S. tech dominate global returns, the emerging markets rally offers a timely reminder: the best opportunities often emerge where others have stopped looking.