Can EM continue to shine?

Emerging-market assets can continue to outperform if the Federal Reserve’s rate-hiking cycle remains brief and the dollar does not strengthen materially.

• Emerging-market debt and equities have outperformed their US counterparts in 2026, supported by a weaker dollar, compelling valuations and robust earnings growth.
• EM equities have roughly doubled US returns this year, while the Bloomberg EM debt index offers a yield-to-worst above 7.5%, compared with 5.3% for the US Aggregate and 4.9% for the Bloomberg Treasury index.
• EM debt issuance is at record levels and sovereign spreads are tight, but country conditions differ substantially, particularly between net oil importers and oil exporters; active management is therefore important.
• The latest Fed rate hike is a headwind because higher US rates can strengthen the dollar, raise energy costs and increase borrowing costs, although stronger institutions and more diversified EM economies may limit the damage.

Takeaway: A soft-landing environment with moderating inflation, positive growth and a range-bound dollar would support EM equities and allow EM debt to perform reasonably well, whereas persistent inflation, a firmer dollar or prolonged Fed tightening would weigh on EM debt.