Emerging markets are roaring back into the spotlight, fuelled by growing bets that the era of US exceptionalism is winding down. Investors are pivoting toward undervalued assets across Latin America, Eastern Europe and Asia, hoping to ride a structural reallocation wave that could reshape global portfolios for years.
After years in the shadow of booming US equities and a strong dollar, emerging markets are finally regaining momentum. This resurgence is being driven by expectations that President Trump’s renewed focus on tariffs could cool US growth, pushing investors to seek higher returns abroad. The result is a surge of capital into developing currencies, bonds, and stocks, with some metrics signalling valuations not seen since the 1980s.
The early signs are compelling. Emerging-market equities are on track for their best first-quarter performance in six years. Local currency debt is gaining traction, and a broad index of developing-world currencies is up nearly 2% year-to-date. Countries like Brazil, Chile, and Colombia are seeing some of the strongest currency gains, while even the Mexican peso — historically sensitive to trade headlines — is drawing bullish interest from hedge funds.
Strategists see this as more than just a short-term rotation. Many believe the current environment could mark the beginning of a long-term shift in asset allocation. Emerging market stocks remain cheap relative to US peers, inflows into dedicated EM funds have yet to turn significantly positive, and years of underperformance have left these assets under-owned. That leaves plenty of room for growth if this renewed investor interest continues.
Supporting this view is the belief that global forces could help cushion any US weakness. Hopes are rising for substantial fiscal stimulus in Europe and continued policy support from China. These moves could maintain global risk appetite even if US growth begins to falter under the weight of trade policy.
Still, there are risks. A surprisingly resilient US economy or more moderate tariff impacts could blunt the emerging market rally. That’s why some managers, like Eric Souders at Payden & Rygel, are maintaining elevated cash positions while holding selective EM positions in places like Vietnam and Mongolia.
But the tide appears to be turning. With real yields still attractive and currencies undervalued, many see emerging markets as a rare opportunity in a world where traditional assets are increasingly priced for perfection. For investors looking beyond the US, the next leg of growth may lie where few were looking just a year ago.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
