Global Capital Flows Shift Toward Emerging Markets
Despite recent gains, investors argue there is still room for further upside, noting that emerging-market assets remain cheap.
Quick overview
- Economic uncertainty in developed economies is driving investor interest toward emerging markets, which are seen as having significant growth potential.
- Emerging-market equities and local-currency bonds have shown strong performance, with the MSCI emerging-market equity index reaching an all-time high and local-currency bonds up 2.2% in 2026.
- Asset managers are increasingly favoring emerging-market currencies and have increased long positions in equities across various regions, while also boosting exposure to precious metals like gold.
- Despite recent gains, investors believe there is still upside potential in emerging-market assets, which remain relatively cheap compared to developed markets.
A Citi report shows that economic uncertainty in developed economies is driving investor interest toward emerging markets, which still offer significant growth potential.
Emerging markets have become the focal point for the world’s largest asset managers — who together oversee more than $20 trillion in assets — as they turn increasingly optimistic on emerging-market equities, currencies, local bonds, and credit. This shift was reflected on Thursday, when MSCI’s main emerging-market equity index reached a new all-time high, posting a 15% gain year-to-date in 2026.
In fixed income, local-currency emerging-market government bonds are up 2.2% so far in 2026, following an 8.5% rally last year — their best performance since 2017. A comparable index of dollar-denominated sovereign bonds is up 1.7% in 2026, after rising 13% in 2025.
At the same time, fund positioning data show that asset managers have increased long positions in equities across Asia, Latin America, and EMEA (Europe, the Middle East, and Africa), according to a report from Citigroup. Managers are also favoring emerging-market currencies over the U.S. dollar.
Despite recent gains, investors argue there is still room for further upside, noting that emerging-market assets remain cheap relative to developed-market peers, while global fund allocations to the sector are still structurally low.
Citi also noted that managers increased their exposure to precious metals during the recent rally, highlighting gold as a key source of portfolio stability.
What’s driving the emerging-market rally
Uncertainty surrounding economic policy and a widening fiscal deficit in the United States have encouraged investors to diversify away from the dollar. Caution has also spread to Wall Street, where renewed concerns have emerged over the broader economic impact of artificial intelligence across multiple sectors.
However, many tech-heavy Asian stock markets have largely shrugged off volatility, as their companies are deeply embedded in the hardware supply chains that power AI infrastructure. On Thursday, South Korean equities rose another 3.8%, overtaking the French and German markets to become the world’s ninth-largest stock market. At the same time, concerns are growing over rising public spending in Japan and Germany.
In this context, Citi said managers view emerging-market debt as their primary duration play, with a clear overweight in credit, contrasting with short positions in U.S. Treasuries and core European sovereign debt.
Despite the tilt toward emerging markets for yield, some investors have also shown confidence in fiscally weaker countries. Funds lent $4.5 billion to Indonesia, enabling the country to complete its largest global bond sale since at least 2017. Meanwhile, many emerging economies in Africa and Latin America continue to benefit from the ongoing commodity boom, which is strengthening their external balances and fiscal outlooks.
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