For much of the last decade, the playbook was clear: Developed markets like the U.S. and Europe offered better growth, lower risk, and a far more predictable return profile. But something shifted this year – and it’s no longer just the contrarian crowd taking notice. Emerging markets (EM) are back in the spotlight, and this time it feels different.
If you’ve been watching the headlines or managing your own portfolio, you may have noticed that global capital is beginning to flow toward countries and sectors many had written off. We’re seeing early signs of a structural change, fueled by a cocktail of macro tailwinds: a weaker U.S. dollar, a rebound in China’s industrial cycle, and higher real yields in local currencies.
So what exactly is going on? And more importantly – should you be adjusting your exposure?
The Dollar Is Finally Cooperating
A big part of the EM story always hinges on the dollar. When the greenback is strong, it puts pressure on EM economies that borrow in dollars, pushing up repayment costs and choking off growth. But 2025 has brought a shift. With inflation cooling and the Fed signaling a pause – or even cuts – investors have started to sell off the dollar, which recently touched its lowest level in over a year against a basket of global currencies.
This decline is significant. A softer dollar effectively loosens financial conditions for many EM economies. It also makes local assets more attractive to foreign investors hunting for yield. In short, EM equities and debt become cheaper to buy and more profitable to hold.
Real Yields That Actually Pay You
Take Brazil, for example. Its benchmark interest rate remains in the double digits even as inflation has cooled, offering real yields that outpace most developed markets. Countries like Mexico, Indonesia, and India also provide compelling local-currency bond opportunities. For investors tired of near-zero or negative real yields in the U.S. and Europe, this is a breath of fresh air.
What’s different this time around is that many EM central banks were ahead of the curve. While the Fed hesitated in early 2024, Brazil and Mexico were already tightening to curb inflation. Now, those same economies are benefiting from the credibility they built. With inflation on a more stable path, there’s room for rate cuts – and a better growth story to sell to global investors.
China: A Surprisingly Stable Rebound
Let’s talk about the elephant in the room – China. After years of lockdowns, regulatory crackdowns, and real estate chaos, most investors had written off a meaningful Chinese rebound. But a few green shoots are beginning to sprout.
Recent data from China’s industrial production and retail sales showed a modest but notable recovery. More importantly, Beijing has stepped back from some of its more aggressive regulatory stances and appears committed to supporting key sectors like EVs, semiconductors, and infrastructure.
For equity investors, that translates to renewed interest in Chinese tech names and industrial suppliers. Alibaba BABA–2.35%, Tencent TCEHY–1.06% , and JD.com JD+0.75% have all seen a pick-up in volumes. Meanwhile, regional supply chains in countries like Vietnam and Thailand are reaping the benefits as China gradually reshuffles its domestic manufacturing priorities.
Sector Standouts: Energy, Financials, and Infrastructure
So, where’s the action? Three sectors in particular are catching the eye of institutional allocators.
First, energy. With global oil prices rebounding and natural gas demand rising in Asia, producers in countries like Brazil and Malaysia are seeing significant revenue tailwinds. Petroleo Brasileiro (Petrobras) PBR–0.95% has gained double digits in the last quarter, supported by high dividends and improved governance.
Second, financials. Local banks in India, Mexico, and Indonesia are reporting record net interest margins as rates stay elevated and loan growth picks up. These aren’t the fragile balance sheets of the 1990s – many of these banks have been reformed, recapitalized, and digitized.
And finally, infrastructure. Whether it’s road-building in India or telecom expansion in Africa, infrastructure plays are booming. Funds that track EM infrastructure development have seen a steady uptick in both retail and institutional inflows this year.
Portfolio Rotation in Progress
What does this mean for portfolios? According to recent fund flow data from EPFR Global, emerging-market equity funds have seen five straight weeks of net inflows, while developed-market equities – particularly in Europe – have faced steady redemptions. At the same time, there’s a marked rotation in global balanced funds, with investors trimming U.S. mega-cap tech in favor of EM sovereign debt and high-growth equities.
Some of this is tactical – playing the dollar downtrend or the China bounce – but there’s also a sense that the EM story is being re-rated. For the first time in years, EM equities are not just a “value” trade – they’re a growth and yield trade rolled into one.
Risks Still Lurk, But So Do Opportunities
Let’s be clear: Emerging markets are never a risk-free bet. Political instability, currency volatility, and global shocks can derail gains in a heartbeat. Argentina’s recent bond sell-off and Turkey’s erratic monetary policy remind us of that. But what’s changed is the relative risk premium. Developed markets aren’t looking so stable either, with geopolitical tension, aging demographics, and fiscal strains clouding the horizon.
If anything, the gap between perception and reality may be narrowing. EMs are better run, better capitalized, and in some cases, better positioned for the next phase of global growth.
The Bottom Line
If you’re managing your own capital or simply trying to understand the evolving global landscape, it’s time to pay closer attention to emerging markets. Whether it’s Brazil’s yield, India’s growth, or China’s recalibration, there are real stories unfolding that warrant inclusion in a forward-looking portfolio.
The EM outperformance isn’t just a blip – it could be the beginning of a new cycle. As someone who’s watched the tug-of-war between developed and emerging markets for years, I can tell you this: it’s rare to see the fundamentals, the technicals, and the sentiment all align this cleanly. That’s worth watching – and maybe even allocating to.
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