Wall Street Bets Big on Emerging Markets for 2026 Amid Surging Capital Inflows

Emerging markets are poised to enter 2026 as one of Wall Street’s most favored bets, with fund managers anticipating the start of a multi-year investment flow cycle.

A surge of capital into the sector this year—the strongest since 2009 across all emerging market securities categories—signals a growing number of investors are allocating funds to an asset class that remained largely overlooked for years following a prolonged period of underperformance.

Emerging market equities are outperforming their U.S. counterparts for the first time since 2017. The spread between EM bond yields and U.S. Treasury yields has narrowed to an 11-year low, while carry trade strategies—largely involving borrowing in low-yield assets to fund higher-yield purchases—have delivered their best profits since 2009.

This enthusiasm was evident at Bank of America’s recent investment conference in London, which hosted approximately 300 investors. Little pessimism regarding emerging markets was observed. David Hauner, Bank of America’s Head of Emerging Markets Fixed Income, offered a clear assessment: “Investors betting against emerging markets are extinct.”

For an explanation of what a carry trade is, you can find more information here.

What may be underway is a more fundamental shift in global investment flows. Portfolio managers are seeking to diversify away from the United States, increasingly drawn to the progress developing nations have made in reducing debt levels and curbing inflation.

Many did not anticipate this shift. Until recently, investors shunned the asset class following years of weak returns and rising concerns over a U.S.-led trade war. Fund managers struggled to market these investments to clients, while hedge funds reportedly saw the best opportunities in betting against emerging markets.

Sami Suzuki, Head of Emerging Markets Equities at AllianceBernstein in New York, stated: “2025 was an inflection point. A year ago, the question was whether EM was investable at all, but we don’t get that question anymore.”

Markets maintained their positive momentum through Monday, with the MSCI Emerging Markets equity index rising 1%, extending its year-to-date gains to 28.5%.

Emerging Markets Poised to Benefit from Weaker Dollar

Banks including JPMorgan Chase and Morgan Stanley have joined the wave of optimism, forecasting that emerging markets will benefit from a weaker U.S. dollar and a massive investment boom in artificial intelligence. JPMorgan anticipates financial inflows of up to $50 billion into emerging market debt funds next year.

Bob Michele, Global Head of Fixed Income at JPMorgan Asset Management, said: “One of our best ideas continues to be to stay invested in local currency emerging market debt. We expect some price appreciation, we expect to harvest carry, and we think EM currencies still have further upside.”

Morgan Stanley also advises clients to hold local currency bonds and buy more U.S. dollar-denominated emerging market debt. Bank of America, meanwhile, expects hard currency emerging market bonds to repeat their more than 10% returns seen this year.

Equity Markets and Portfolio Rebalancing

Investment positioning could be a supporting factor; despite the rally, investment flows remain relatively modest so far.

Strategas Securities estimates that U.S. exchange-traded funds focused on emerging market equities attracted approximately $31 billion in 2025. Emerging market debt funds drew over $60 billion, according to EPFR Global data compiled by Bank of America, though this follows $142 billion in outflows over the preceding three years. This suggests emerging markets remain underweight in global portfolios.

Todd Sohn, Senior ETF and Technical Strategist at Strategas in New York, commented: “This year saw asset allocators come back after a tough five-year period. Many realized they were over-invested in large-cap U.S. growth equities and diversified globally.”

Meanwhile, emerging markets’ share in global equity and bond indices is increasing. Equities have risen by over one percentage point in index weight compared to developed markets, nearing 13% in the Bloomberg Global Large & Mid Cap Equity Index. The share of emerging market debt in the Bloomberg Global Aggregate Bond Index has also grown.

Rajeev De Mello of Gama Asset Management believes investors have finally begun re-engaging with emerging markets but sees room for them “to move to a more substantial overweight.”

U.S. Dollar’s Role in EM Performance

The current year’s rally may mask some weaknesses within the asset class. China, caught in a deflationary cycle, could pose a challenge by exporting its excess production capacity to other developing nations, putting pressure on local industries.

The biggest test, however, lies with the U.S. dollar. Its 8% decline this year has supported emerging market assets, but many believe it could rebound if the Federal Reserve delivers fewer interest rate cuts than anticipated. Citigroup strategies, for instance, advise clients to buy only those emerging market assets capable of withstanding a potential return to dollar strength.

Despite this, Citigroup forecasts a 5% total return from emerging market bonds next year. Bob Michele of JPMorgan Asset Management maintains his optimistic positions in EM debt, expecting “very high” real yields to continue attracting investors even in a scenario of dollar strength.

Emerging Market Funds Attract Billions

Currently, liquidity is flowing strongly, with emerging market debt funds attracting $4 billion in the week ending December 17, the largest weekly inflow since July. If emerging markets can withstand U.S. dollar volatility and shifts in Federal Reserve policy, cautious investors may become convinced that a structural asset reallocation is indeed taking shape, according to AllianceBernstein’s Suzuki.

Suzuki concluded: “This amount of uncertainty provides an entry point for investors into the market. When everyone believes in this trend, it might be too late.”