Emerging Markets: The New Engine Of Global Growth
The case for emerging markets has become increasingly compelling due to a weakening U.S. dollar, strengthening fundamentals, and attractive valuations. Emerging markets' 2025 rally was built on strong earnings, not hope or cheap money.
Intelligence analysis by Llama 3.3 70B
Emerging markets are well-positioned for renewed investor interest, with recent outperformance suggesting EM equities may be at the start of a new growth cycle, driven by strong earnings and a weakening U.S. dollar.
Imagine you have a lemonade stand in a country where the money is not as strong as it used to be. This makes it easier for people from other countries to buy your lemonade, and you can also buy more things you need to make your lemonade stand better. That's kind of what's happening with emerging markets, where countries like China and India are growing and becoming more attractive to investors.
Analysis
Weakening U.S. Dollar Impact
The decline of the U.S. dollar in 2025 was the worst calendar-year performance in over 20 years, and the conditions behind it are still in place. A weaker dollar eases emerging markets' financial conditions, reduces dollar-denominated debt burdens, and historically coincides with sustained emerging markets outperformance versus developed markets.
The U.S. dollar's decline is expected to continue, which would further support emerging markets' growth. The weakening dollar would make emerging markets' exports more competitive, increase their purchasing power, and attract more foreign investment.
Emerging Markets' Earnings Outperformance
Emerging markets' earnings growth, led by North Asia's AI supply chain, outpaces developed markets and is broad-based, providing a durable foundation for continued relative outperformance. The earnings growth is driven by the increasing demand for technology and the growing middle class in emerging markets.
However, risks remain from political and macro factors, such as trade tensions, geopolitical instability, and commodity price volatility. These risks could impact emerging markets' earnings growth and investor sentiment.
Attractive Valuations and Fund Positioning
Emerging markets trade at a meaningful discount to developed markets, with improved sector composition and lower leverage. Global funds remain underweight, and capital rotation into emerging markets is still in early stages, suggesting room for further upside.
The attractive valuations and fund positioning make emerging markets an attractive investment opportunity. The growing demand for emerging markets' assets, driven by their strong earnings growth and weakening U.S. dollar, is expected to continue, supporting further gains.
Key points
- Weakening U.S. dollar supports emerging markets' growth
- Emerging markets' earnings growth outpaces developed markets
- Attractive valuations and fund positioning support further gains
If the U.S. dollar continues to weaken and emerging markets' earnings growth remains strong, it could lead to a significant increase in investor interest and a further rally in emerging markets' equities. The growing demand for technology and the increasing middle class in emerging markets could also drive growth and attract more foreign investment.
However, if trade tensions, geopolitical instability, or commodity price volatility increase, it could negatively impact emerging markets' earnings growth and investor sentiment, leading to a decline in their equities. The risks associated with emerging markets, such as political instability and corruption, could also deter investors and limit their growth.
