Emerging market rally hits 15-year high as weaker USD fuels global shift

Emerging market assets are surging at their fastest pace since 2009 as investors flock to developing economies, drawn by a weaker USD, high real yields, and attractive valuations, the Financial Times reported yesterday.

An MSCI benchmark of emerging-market equities climbed 28% YTD — its biggest gain over the period in over 15 years — while a JPMorgan index tracking local-currency government bonds is up 16%. Both indices are rebounding from what analysts have called a “lost decade” of underperformance against US markets. Meanwhile, MSCI’s developed-market stocks index is up less than 17% this year, the salmon-colored paper said.

The turnaround follows years of stagnation: Emerging market equities rose just 9% in total between 2010 and 2024, trailing one of the strongest US bull runs in history. “After 15 years of very mediocre performance, the stars are finally aligning and the most important variable there is the USD,” Ian Simmons, senior portfolio manager at Fiera Capital, told the FT, citing the USD’s slide under President Trump’s administration and the Federal Reserve’s shift toward rate cuts.

A softer USD has eased financial pressures on developing economies by lowering the costs of servicing USD-denominated debt, while falling US yields have spurred renewed appetite for local-currency bonds offering high inflation-adjusted returns. Roughly half of this year’s gains in JPMorgan’s EM bond index stem from FX moves, according to Damien Buchet, chief investment officer of Principal Finisterre.

The rally has been strongest in Brazil, Mexico, Colombia, Hungary, and South Africa, where high real rates have kept carry trades appealing, Bloomberg reports. “You can have these multi-year virtuous circles within emerging markets where capital inflows drive improving fundamentals, which will bring more capital inflows,” said Kenneth Orchard, head of international fixed income at T. Rowe Price. Meanwhile, countries with fragile finances — think Turkey — continue to maintain double-digit policy rates to draw capital.

Governments are tapping into investor demand: Local-currency bond issuance across 17 major emerging markets outside China has hit a record USD 286 bn YTD, S&P Global Ratings’ head of emerging markets credit research Zahabia Gupta told the FT.

The rally has also spilled into equities tied to the global AI boom, with South Korea’s Kospi and Taiwan’s Taiex both reaching record highs as investors pile into chipmakers and hardware suppliers for data centers. Taiwan Semiconductor Manufacturing Company alone now represents about 11% of the MSCI EM Index — more than the combined weighting of several countrie, according to the FT.

Despite the surge, EM assets remain cheap. The MSCI EM Index trades at about 14x forward earnings, compared with 23x for the S&P 500, according to William Blair portfolio manager Vivian Lin Thurston. That valuation gap has fueled much of this year’s “re-rating” in emerging markets, as investors calibrate expectations.

MARKETS THIS MORNING-

Asian markets are trading mixed this morning, with the Shanghai Composite up 0.5%, Japan’s Nikkei almost unchanged, and Hong Kong’s Hang Seng inching down 0.8%. Meanwhile, Wall Street futures are slightly inching up, after the S&P ended a 7-day streak of gains.

THE CLOSING BELL-

The DFM rose 0.5% yesterday on turnover of AED 429.6 mn. The index is up 15.1% YTD.

In the green: Commercial Bank of Dubai (+5.2%), Emirates Central Cooling Systems Corporation (+3.1%) and Emirates NBD (+2.6%).

In the red: National Central Cooling Co. (-2.6%), Taaleem Holdings (-2.4%) and Ekktitab Holding Company (-1.6%).

Over on the ADX, the index rose 0.2% on turnover of AED 1.2 bn. Meanwhile, Nasdaq Dubai was up 0.4%.