After a Standout Year, Emerging Markets Fuel Big Expectations for 2026

Emerging markets are shaping up to be one of Wall Street’s most compelling investment themes as 2026 approaches, with many money managers positioning for what they believe could be a prolonged period of renewed capital inflows. After years of being overlooked, the asset class is once again attracting serious attention, as investors reassess global growth prospects and search for opportunities beyond the US.

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The momentum behind this shift has been building throughout the year. Capital flows into emerging-market assets have surged at a pace not seen since 2009, making this the strongest year for inflows across emerging-market equities, bonds, and currencies in more than a decade. That wave of investment suggests a growing conviction that the sector has entered the early stages of a multi-year recovery, rather than a short-lived rebound.

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For much of the past decade, emerging markets struggled to stay in favor with global investors. Slower economic growth, political uncertainty, and the dominance of US technology stocks kept capital anchored in developed markets.

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Many portfolios trimmed or abandoned exposure altogether as returns lagged and volatility remained elevated. The recent surge in inflows, however, points to a meaningful shift in sentiment, with investors increasingly willing to reengage after years on the sidelines.

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One of the clearest signs of this changing dynamic can be seen in relative equity performance. For the first time since 2017, emerging-market stocks are outperforming their US counterparts.

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That reversal is significant, as US equities have dominated global markets for most of the past decade, supported by strong earnings growth, resilient consumer demand, and the rapid expansion of artificial intelligence-related businesses. The fact that emerging stocks are now gaining ground suggests investors are broadening their focus and reassessing where future returns may come from.

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Bond markets are also reinforcing the narrative. The yield gap between emerging-market debt and US Treasuries has narrowed to its smallest level in 11 years, reflecting both improving confidence in emerging economies and shifting expectations for US interest rates.

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As Treasury yields stabilize and inflation pressures ease, emerging-market bonds are appearing less risky relative to their developed-market peers, making them increasingly attractive to income-seeking investors.

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Currency markets tell a similar story. Carry trade strategies which typically involve borrowing in low-yielding currencies to invest in higher-yielding emerging-market assets have delivered their strongest returns since 2009.

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These trades tend to perform best in periods of stable volatility and supportive global liquidity, conditions that have largely defined the market environment this year. The resurgence of carry trade profitability underscores growing investor comfort with risk and confidence in emerging-market fundamentals.

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Several structural factors are also contributing to the renewed appeal of emerging markets. Many countries entered this period with healthier balance sheets, lower debt burdens, and central banks that moved earlier than the Federal Reserve to control inflation.

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As a result, some emerging economies now have greater flexibility to cut rates or stimulate growth if conditions weaken, providing an additional tailwind for local assets.

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At the same time, valuations across emerging markets remain relatively attractive compared with developed markets, particularly the US. After years of underperformance, equity multiples are still modest by historical standards, giving investors a potentially favorable entry point if earnings growth continues to improve. For long-term allocators, that combination of lower valuations and improving macro stability is difficult to ignore.

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That said, investors remain selective. Rather than treating emerging markets as a single, uniform trade, money managers are increasingly focused on country-specific and sector-specific opportunities.

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Markets with strong domestic demand, improving governance, and exposure to global manufacturing shifts are drawing the most interest, while those with persistent political or fiscal challenges continue to lag.

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As 2026 approaches, the growing consensus on Wall Street is that emerging markets may finally be turning a corner. The scale of this year’s inflows, the improvement in relative performance, and the revival of carry trade returns all point to a broader reallocation underway. While risks remain, particularly around geopolitics and global growth, many investors see the current environment as one that favors sustained engagement rather than a fleeting trade.

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