After Seven Lost Years, the Emerging Markets Trade Is Back
Capital is rotating out of US assets and into emerging markets at the fastest pace in two years. Seven lost years, one weakening dollar — here's where the money is actually going.
For most of the past decade, recommending emerging market equities was a good way to lose clients. Between 2018 and 2024, EM stocks underperformed developed markets by roughly 47 percentage points — a stretch long and painful enough that entire allocation committees simply wrote the asset class out of their models. Reuters called it the "valley of tears," and the name stuck because it was accurate.
That era appears to be ending. Since early 2025, emerging market equities have outperformed developed markets by roughly 15 percentage points cumulatively. Capital flows into EM bonds and equities turned positive again this summer and, per Capital Economics' August monitor, are approaching their highest level in more than two years. And the force that spent a decade crushing every EM rally — a relentlessly strong dollar — has reversed: the DXY index fell around 9 percent in 2025, its steepest annual decline in nearly eight years, and broke below 97 in early 2026 to a four-year low. Every major bank forecast we've seen has it lower still by year-end.
The question for investors is no longer whether something changed. It's whether this is another tradable bounce — there were false dawns in 2016, 2020, and 2023 — or the start of a regime shift.
The Turn Shows Up in Three Places
Flows. After years in which foreign capital treated EM as a rental, portfolio flows into emerging market bond and equity markets are back in positive territory and nearing two-year highs. Notably, this happened through a summer of tariff noise, war headlines, and AI-driven volatility — shocks that historically triggered indiscriminate EM selling.
Performance. The MSCI Emerging Markets index has outpaced US equities this year, with India up strongly on the back of roughly 6.8 percent GDP growth and heavy foreign institutional buying, and Chinese equities staging a double-digit rebound from their March lows on central bank easing and a fiscal package in the trillions of yuan.
The dollar. Dollar weakness is the classic EM accelerant — it lowers the local-currency burden of dollar debt, flatters returns for unhedged foreign investors, and gives EM central banks room to cut. All three channels are now running in EM's favor simultaneously for the first time since the early 2010s.
Why the False Dawns Failed — and Why This One Looks Different
Previous EM rallies died for the same few reasons: the Fed re-tightened, the dollar re-strengthened, and emerging economies themselves were fragile — thin local capital markets, jumpy foreign creditors, central banks with limited credibility.
The structure underneath has changed. Of the 23 EM central banks tracked by J.P. Morgan's research team, 14 are still expected to cut rates further — from a position of credibility, not crisis. EM yield and credit spreads versus developed markets continue to tighten. Local pension funds and insurers now provide a domestic bid that simply didn't exist at scale in 2013, making these markets far less hostage to foreign hot money. Earnings did their part too: EM delivered roughly 14 percent earnings growth last year, and earnings revisions are now positive relative to developed markets.
And yet EM equities still trade at about 14x forward earnings — a 32 percent discount to developed markets, wider than the long-term average discount of 27 percent — while remaining under-owned relative to benchmarks. Cheap, improving, and under-allocated is historically the best three-word setup in markets.
But the index-level story hides the part that actually matters for positioning. Beneath the surface, this rotation is violently uneven — some markets are absorbing the bulk of the inflows while others are quietly being sold, and the difference is not what the benchmark weights would suggest.
The rest of this briefing is free — it just requires a free AlphaBriefing account: the country-by-country map of where the inflows are actually landing (and the trap hiding inside the benchmark), the three cleanest instruments for expressing the rotation, and the four signals that would tell you the trade is over.
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