For the last fifteen years, investors who invest in Emerging Markets (EM) have fought an uphill battle against "greenback gravity," a phenomenon where a strong dollar systematically drains returns from equity markets. | But 2026 marks a potential inflection point, with the dollar weakening, valuations having reset, and accelerating earnings growth in emerging markets. After a decade of underperformance, the setup for EM equities looks increasingly compelling. |  | MSCI EM vs. S&P 500 Annualized Returns |
| Let's break down why the dollar matters so much, what changed in 2025, and where the opportunities lie in 2026. |
|
| | Why the Dollar Dictates Everything | When the dollar strengthens, emerging market returns suffer through three channels: |  | How strong $ punishes emerging markets |
| The damage is real. Since 2010, the MSCI Emerging Markets Index has lagged developed markets by 6% annually—a period defined by persistent dollar strength. | Index | 3-Year Return | 10-Year Return | 10-Year Volatility | MSCI Emerging Markets | 16.9% | 8.9% | 16.6% | MSCI World | 22.0% | 12.7% | 14.7% | MSCI ACWI | 21.4% | 12.3% | 14.5% |
|
|
| | | | | Nvidia CEO Jensen Huang has a habit of making industry-altering announcements at the world's top showcases. And his latest revelation, which could come as early as opening night on Jan. 6… | Could skyrocket Nvidia's stock even further. | And they aren't the only company eagerly awaiting this date. Companies partnering with Nvidia could see their own stocks benefit as well. | That's because Nvidia often announces new or expanded collaborations at these marquee events. | And with Nvidia recently pivoting to two breakthrough technologies they intend to conquer, a move valued at more than $24 trillion, a small handful of Nvidia's other partners could see their own stocks surge upward. | They're virtually unknown right now, but that might not be the case much longer. | And it all starts on Jan. 6. | Click here to find out who they are today. |
| |
| | |
| The 2025 Turning Point | In the first half of 2025, the dollar fell 10.7% as Fed rate cut expectations accelerated. The MSCI Emerging Markets Index surged 8.9%, outpacing developed markets. | South Korea delivered a 76% rally—the year's best performance globally. Samsung and SK Hynix rode the AI semiconductor boom, proving that powerful growth stories can overwhelm currency headwinds. | Brazil offered real yields around 9.2% (15% rates, 4.4% inflation)—among the highest globally. This attracted massive inflows. The Ibovespa gained 47.9% in dollar terms. | The lesson: when the dollar weakens, and local growth accelerates, emerging markets deliver explosive returns. |
|
| | Capital Flows: The Tide is Turning | Here's the critical insight: emerging markets comprise just 7% of international portfolios despite representing 40% of global GDP. This systematic under-ownership means any sustained dollar weakness could trigger a massive rotation as investors rebalance. | Global FX turnover hit a record $9.6 trillion daily in 2025, up 28% since 2022. The Mexican peso now trades $153 billion daily, while the rupee and renminbi continue gaining liquidity. |
|
| | Where the Smart Money is Flowing | "Soft Tech" Is Winning: China's Internet Platforms And AI Software Companies Dramatically Outperformed in 2025. The MSCI China Index (37% soft tech) rallied 17%, crushing onshore A-shares. Software firms face less tariff risk and faster adoption. "Hard Tech" Faces Headwinds: Taiwan's semiconductor-heavy index (78% hard tech) underperformed as investors questioned the vulnerability of its supply chain. India: Growth At a Premium: Fastest-growing large economy, but trading at 31x P/E. Little room for error if the dollar strengthens. Latin America: The Carry Trade: High real rates buffer volatility. Works for yield-hungry investors who can stomach currency swings.
|
|
| | The Risks Still Matter | Corporate Maturity Wall: 38% of global corporate bonds mature by 2027. Refinancing at higher rates means coupon shock. Geopolitical Volatility: Trade tensions can trigger flight-to-safety flows. The dollar's safe-haven status endures. Uneven Recovery: Not all regions benefit equally from dollar weakness.
|
|
| | The 2026 Playbook | Goldman Sachs recently raised its 12-month MSCI Emerging Markets Index target to 1,480—implying 8% price appreciation from late 2025 levels. The thesis rests on three pillars: | Earnings Acceleration: EM companies expected to deliver 14% earnings growth in 2026, matching or exceeding U.S. growth rates. Valuation Gap: EM equities trade at a 40% discount to U.S. markets on forward P/E, below historical averages. Positioning Gap: Institutional under-ownership creates rebalancing tailwinds as global allocation normalizes.
|
|
| | Wall Street Isn't Warning You, But This Chart Might | | Vanguard just projected public markets may return only 5% annually over the next decade. In a 2024 report, Goldman Sachs forecasted the S&P 500 may return just 3% annually for the same time frame—stats that put current valuations in the 7th percentile of history. | Translation? The gains we've seen over the past few years might not continue for quite a while. | Meanwhile, another asset class—almost entirely uncorrelated to the S&P 500 historically—has overall outpaced it for decades (1995-2024), according to Masterworks data. | Masterworks lets everyday investors invest in shares of multimillion-dollar artworks by legends like Banksy, Basquiat, and Picasso. | And they're not just buying. They're exiting—with net annualized returns like 17.6%, 17.8%, and 21.5% among their 23 sales.* | Wall Street won't talk about this. But the wealthy already are. Shares in new offerings can sell quickly but… | 👉 My subscribers skip the waitlist | *Past performance is not indicative of future returns. Important Reg A disclosures: masterworks.com/cd. | | The Bottom Line | After fifteen years of dollar dominance, the structural headwinds facing emerging market equities are finally easing. The Federal Reserve's shallow easing cycle, combined with historically wide valuation gaps and robust earnings growth in technology and AI-adjacent sectors, creates a compelling case for EM outperformance in 2026. | The dollar's grip is loosening. For investors willing to look beyond home market bias, emerging markets offer not just diversification benefits but genuine return potential. | As U.S. earnings exceptionalism fades, the decade ahead belongs to the markets that were left behind in the 2010s. |
|
| | | | | Important disclosures: This newsletter is provided for informational purposes only and does not constitute investment advice. All investments involve risk, including possible loss of principal. Please consult with your financial advisor before making investment decisions. |
| |
| | |
|
|
No comments:
Post a Comment