Emerging markets are experiencing their strongest rally in more than 15 years, as global investors flock to developing economies in search of higher yields and undervalued assets.
"After 15 years of very mediocre performance, the stars are finally aligning, and the most important variable there is the dollar," said Ian Simmons, senior portfolio manager at Fiera Capital. "Whether by design or accident, the US seems to have engineered a weaker dollar, and that's good news for developing economies."
A weakening dollar traditionally serves as the biggest tailwind for emerging markets. It makes dollar-denominated debt cheaper to service, strengthens local currencies, and channels investor appetite toward higher-yielding assets in riskier geographies.
The Federal Reserve's shift toward cutting interest rates has amplified this effect, easing global financial conditions and encouraging capital flows back into developing economies. Roughly half of this year's bond market gains have come from foreign exchange movements, underscoring the role of currency appreciation in the rally.
With real yields remaining high- especially in markets such as Brazil, South Africa, and Turkey- investors have been quick to re-enter positions once shunned over inflation and policy concerns. Even Asian economies with lower interest rates, including Thailand and Malaysia, have benefited as falling inflation keeps domestic bonds attractive to local investors.
Beyond currencies, the current momentum reflects a deeper change in investor psychology. Emerging markets are once again being seen as viable alternatives to the US and Europe, whose equities have long commanded premium valuations.
On a price-to-earnings basis, emerging market equities are trading at roughly 14 times projected earnings for the next year, compared with about 23 times for the S&P 500.
"What has driven emerging-market performance year to date is valuation," said Vivian Lin Thurston, portfolio manager at William Blair. "There is still a big gap between the US and the rest of the world, and investors are starting to rebalance accordingly."
Some analysts even describe this as the "dusk of US exceptionalism," as unpredictable policy in Washington pushes investors toward more disciplined emerging economies offering better risk-adjusted returns.
A surprising driver of the rally has been the global AI investment boom, which has spilled over into emerging markets that dominate semiconductor production.
South Korea's KOSPI and Taiwan's TAIEX indices have both hit record highs in recent weeks, powered by investor demand for chipmakers and infrastructure companies supporting AI data centers. Taiwan Semiconductor Manufacturing Company, the world's largest chipmaker, now accounts for about 11% of the MSCI Emerging Markets- more than the stocks of most individual countries combined.
Meanwhile, local currency bond issuance across 17 large emerging markets has reached a record US$ 286 billion this year, signaling renewed confidence in domestic capital markets and improved access to funding.
For Africa, the global resurgence of emerging market optimism could mark a turning point. Many African economies- particularly Kenya, Ghana, Nigeria, and Egypt- have spent the past 2 years struggling with tight external financing conditions, high debt costs, and exchange rate pressure.
A sustained period of dollar weakness and lower global interest rates could ease these constraints by reducing external debt servicing costs and improving access to portfolio inflows. African bond markets, which have historically suffered under US monetary tightening, stand to benefit from renewed investor appetite for high-yield local currency debt. Continued disinflation across several African economies could strengthen real returns, drawing both domestic and foreign investors.
The durability of this rally will depend on whether global monetary easing continues and whether emerging economies can maintain policy stability. A sudden reversal in dollar dynamics or a spike in geopolitical risk could quickly test the resilience of these gains.
Yet for now, the fundamentals appear more favorable than at any point in the past decade. Emerging markets are cheaper, their currencies are stronger, and their fiscal positions are generally more disciplined than during past cycles.
After years of underperformance and outflows, emerging markets are once again commanding global attention- and as the world's financial tides shift, Africa and other developing economies may finally be poised to ride the next wave of capital inflows rather than struggle against them.