There is much more in their favor than simply "sell America," writes The Economist.
For much of the past 20 years, emerging markets (EMs) have seemed like they would never truly “break out.” The world’s growing economies were supposed to offer the most daring investors the opportunity for very high returns: benefiting from the faster growth of middle-income countries as they catch up with the rich.
According to the IMF, emerging and developing economies have, on average, grown output faster than advanced economies every year this century, often by several percentage points.
However, after the great boom of the 2000s, their stock markets have, until recently, generated poor returns. It took until 2021 for the MSCI index of EM stocks to return to its 2007 peak, only to quickly fall again, by over 40%.
Now EM stocks are rising strongly again. The MSCI index that tracks them rose 34% in 2025, compared with 21% for the developed-market equivalent. So far this year, EMs are up another 9%.
Currencies from the Mexican peso to the Malaysian ringgit have strengthened against the dollar. EM bond returns in local currencies have surpassed those of US or European high-yield debt. Can this extraordinary performance continue?
A big part of the answer depends on what happens to the dollar. Since the late 1960s, when the Bretton Woods system of fixed exchange rates began to unravel, the dollar has gone through four major bear markets.
Each time, according to analysts at Bank of America, EM stocks have rallied. The latest success has come as the dollar’s strength has waned again. So far, against a basket of rich-country currencies, it is just 11% below its 2025 peak, a slight decline from the 41% between 2002 and 2008.
If traders continue to sell dollars, EM assets have plenty of room to gain. Although emerging market governments are increasingly borrowing in their own currencies, especially in Asia, many still have large amounts of dollar debt.
A weaker dollar makes this debt cheaper to service and repay. At the same time, it supports dollar-denominated international trade, such as exports of basic goods.
And the capital leaving America has to go somewhere. The average portfolio allocation to EM stocks by active managers is near its lowest level in two decades, making these assets an obvious choice for diversification.
However, the bullish case for EM is not based solely on the “sell America” strategy, i.e. reducing exposure to US assets. There are three reasons why even the most America-focused investors should consider them: relative low stock prices, sustainability and the potential to benefit from global growth.
Low prices are the most obvious attraction. Although EM stocks look expensive relative to their history, at about 13 times expected earnings for the next year, they remain about 40% cheaper than the US S&P 500 index.
American tech giants stand to gain a lot from AI, but so do companies in China, South Korea, and Taiwan. Investors can benefit from the same trend with lower prices and more diversification.
In the event of global economic shocks, EMs are much better prepared than before. Middle-income countries in Latin America and Asia have built stronger institutions, accumulated foreign exchange reserves, and strengthened central banks.
This was seen in 2022, when many of them raised interest rates before the FED and ECB, successfully reducing inflation. Investing in EM remains riskier than in advanced economies, but much less so than before.
In fact, the global economic outlook looks very close to ideal conditions for EMs. The IMF predicts sustained, albeit slower, global GDP growth in 2026, with EMs expected to grow 2.4 percentage points faster than rich economies.
The Fed is expected to cut interest rates further and fears of a recession are limited. In other words, the situation is neither too hot nor too cold, ideal for encouraging investment in slightly riskier markets with higher return potential.
It would help if Donald Trump gave investors even more reasons to avoid US assets, but even without that, EM growth may only be at its beginning./monitor
