Major Wall Street financial institutions widely predict that emerging markets will experience another year of strong performance in 2026. A weak US Dollar trend and the continuously expanding investment wave in artificial intelligence are seen as two key drivers for the development of this asset class.
Analyses from several banks indicate that increasing downward pressure on the US Dollar and potential further interest rate cuts by the Federal Reserve provide significant support for emerging market assets. Strategists at Morgan Stanley (MS) emphasize that a slowdown in the US economy will prompt a shift towards looser monetary policy, thereby boosting the performance of emerging market local currency bonds and currencies. So far this year, emerging market local currency bonds have achieved a total return of approximately 7%, the best level since 2020; the currency index has also risen over 6% during the same period. The bank recommends investors maintain long-term positions in local currency bonds, forecasting that such bonds could deliver returns up to 8% by mid-2026. Emerging market US Dollar bonds are also expected to achieve “high single-digit” returns within 12 months.
Besides Morgan Stanley, Bank of America (BAC) and Goldman Sachs (GS) also expect the US Dollar’s weakness to persist. Bank of America’s strategy team predicts that emerging market local currency bond returns could exceed 10% in 2025 and recommends the Turkish Lira and Brazilian Real as high-quality carry trade targets. Strategists led by David Hauner noted in a report that their base scenario includes a weaker US Dollar, lower interest rates, declining oil prices, and moderate equity gains. However, they also cautioned that market volatility might increase compared to the past six months, as historical data shows risk premiums are difficult to sustain at very low levels for extended periods.
On the other hand, massive capital investment in the artificial intelligence sector is injecting structural momentum into emerging markets. Analysis from J.P. Morgan (JPM) shows that AI-related capital expenditure in the US is projected to reach $628 billion by 2028. This trend is expected to transmit to emerging economies through increased demand for technology exports and rising metal prices. The strategy team led by Luis Oganes maintains an optimistic outlook on emerging market currencies and local bonds, anticipating that emerging market bond funds will attract $40 to $50 billion in inflows in 2025. The report emphasizes that improved market sentiment, combined with investors’ underweight positioning in emerging market assets, will be a significant driver of capital inflows.
