Wall Street Stays Bullish on Emerging Markets Heading Into 2026

Major Wall Street institutions are preparing for another strong year in emerging markets, expecting a softer US dollar and the global surge in artificial intelligence investment to deliver fresh momentum to the asset class. These forces, they argue, will reinforce gains that emerging-market investors have already captured this year, setting the stage for continued outperformance.

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So far, 2025 has rewarded investors who leaned into the space. Local-currency emerging-market bonds have generated returns of about 7% their best performance since 2020 while a broad emerging-market currency index is up more than 6%. Morgan Stanley strategists believe this rally has room to keep running, supported by expectations that the Federal Reserve will cut interest rates further as US economic growth cools.

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With that backdrop, Morgan Stanley is advising clients to maintain long exposure to local-currency emerging-market debt. The bank sees returns landing near 8% by mid-2026. For emerging-market dollar-denominated debt, the firm anticipates “high single-digit” gains over the next 12 months.

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“Federal Reserve rate cuts tend to weigh on the dollar, pull Treasury yields lower, and create a supportive environment for emerging markets,” said James Lord, who leads emerging-market FX strategy at Morgan Stanley.

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A major piece of the bullish thesis hinges on stronger emerging-market currencies as the dollar weakens. A gauge that tracks carry-trade returns across eight emerging markets funded by short positions in the dollar has already jumped more than 12% this year. That’s the strongest showing since the aftermath of the global financial crisis, reflecting how recent dollar softness has revived appetite for yield-enhancing strategies.

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Other big banks are echoing this constructive outlook. Both Bank of America Corp. and Goldman Sachs Group Inc. also foresee a weaker dollar supporting emerging-market assets. Bank of America’s team expects emerging-market local bonds to deliver returns of more than 10% next year and has singled out the Turkish lira and Brazilian real as their preferred currencies for carry trades.

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“The BofA baseline assumes a declining dollar, lower global rates, softer oil prices, and moderately stronger equities,” wrote strategists led by David Hauner. However, they cautioned that market volatility could be more pronounced than what investors have seen in the past half-year.

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“Historically, risk premiums don’t remain this low for long,” they warned.

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Another catalyst gaining attention is the explosive growth in global AI-related capital expenditures. JPMorgan Chase & Co. estimates that AI-focused investment in the US alone will reach $628 billion by 2028, a staggering figure that is expected to ripple through global supply chains and benefit emerging markets. According to the bank, the boost will be felt primarily through stronger demand for technology exports and firmer metals prices, both of which could support emerging economies.

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JPMorgan strategists, led by Luis Oganes, remain firmly constructive on emerging-market currencies and local debt. They project that emerging-market debt funds will attract between $40 billion and $50 billion in inflows next year as global investors rotate back into riskier assets.

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“We think a mix of improving market sentiment and persistent under-allocation to emerging-market assets will pull capital back into the space,” the team wrote.

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Taken together, the cross-bank consensus paints a picture of an asset class poised for another strong year. A weakening dollar, friendlier rate conditions, and powerful structural trends such as the global race to build AI infrastructure form a supportive foundation for emerging-market performance. While risks remain, especially if volatility rises or US economic data surprises to the upside, the overarching view from Wall Street is clear: emerging markets are entering 2026 with compelling tailwinds and renewed investor interest.

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