With falling dollar values, low interest rates and improved fiscal metrics, emerging markets are positioning themselves as attractive investment opportunities. Is this time truly different for the Global South? Of all the trades this year, perhaps the most surprising has been the outperformance of an asset class long shunned by global investors: emerging markets.
After more than a decade of disappointing returns and repeated false dawns, these economies – often seen as perpetually stuck in cycles of boom, bust and political uncertainty – have staged a compelling comeback. Going into 2025, the one thing that investors and market pundits all seemed to agree on was the narrative of “American exceptionalism”. US equities had outperformed all others for years, largely on the back of the supercharged Magnificent 7 tech stocks.
The year 2025 was simply meant to follow a familiar pattern. Why bother with taking the added political risk and uncertainty of investing in “Global South” markets when you could outperform by simply allocating to the world’s largest and most powerful economy? An MSCI benchmark index of emerging-market stocks has risen 28% so far this year, its biggest gain over the same period since 2009, while a JPMorgan index of government bonds sold by developing countries in their own currencies is up 16%, in a growing comeback from a “lost decade” in the shadow of US markets.
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This rally in emerging market stocks has far outpaced gains in advanced economies; an MSCI index of developed market stocks is up less than 17% so far this year. It marks a striking turnaround from the previous 15 years. Emerging market stocks massively underperformed one of the greatest US bull runs in history between 2010 and 2024, with the MSCI Emerging Market Index gaining less than 9% over that entire period after its early 2000s rally collapsed into perennial cycles of boom and bust, and serial underperformance.
For those invested in South African equities, this will sound all too familiar. After a decade and a half of mediocre performance, the stars seem to finally be aligning for emerging markets. What has precipitated this shift?
First, and perhaps most obviously, is the fall in the the dollar, down almost 10% this year against a basket of currencies, according to Bloomberg data. A weak dollar usually eases financial conditions in developing countries, by making it cheaper to service dollar-denominated debts. The Federal Reserve’s shift to cutting US interest rates has also supported dollar-funded bets on local currency bonds that still have relatively high yields when adjusted for inflation.
Central banks in bigger emerging markets such as Brazil and South Africa have continued to keep an extremely hawkish stance on inflation, as paragons of monetary prudence and central bank independence. An example of this is the SA Reserve Bank’s monetary policy shift, tightening its inflation target to an explicit 3% from the previous banded approach. This was a clear signal of intent to bond investors. South Africa’s local 10-year bond is trading at levels not seen for more than 10 years, with its yield now lower than 8.5%.
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