From the Brazilian real to Asian tech stocks, is the emerging market boom nearing its end?

Since the beginning of this year, some of the most popular emerging market trades, such as going long on the Brazilian real and betting on AI-related stocks, have become so overcrowded that asset managers are expressing concerns, warning that a correction may be inevitable.

Wells Fargo noted that as one of the best arbitrage trades for 2025, Latin American currencies have become detached from their fundamentals in terms of valuation. Fidelity International is concerned about the less liquid African markets, considering them at risk should global volatility surge. Meanwhile, Lazard Asset Management is remaining highly vigilant after Asian tech stocks saw their worst selloff since April earlier this November.

“Investors are too complacent about emerging markets,” says Brendan McKenna, emerging market economist and FX strategist at Wells Fargo in New York. Although the market may continue to perform well in the short term, a correction will eventually arrive. He states:

“Nearly all FX valuations are overstretched and do not reflect the many risks lurking in the markets.”

The combination of Fed rate cuts, a weaker dollar, and the AI boom has fueled astonishing gains in emerging markets this year, but also signs of overheating in many sectors. The very capital flows that drove the rally now pose the risk of a sudden reversal, which could impact global market sentiment and tighten liquidity across asset classes.

Clear Signs of an Overheated Rally

The rally in emerging markets has reached levels unseen in years. The MSCI Emerging Markets Equity Index has posted monthly gains through October, marking its longest winning streak in over twenty years. The index is up nearly 30% this year, on track for its best annual performance since 2017 (when it rose 34%).

However, history offers a cautionary tale: after a big rally in 2017, the index plunged 17% in 2018, as a more hawkish-than-expected Fed, trade tensions, and a surging dollar combined to end the overcrowded rally in emerging market equities, arbitrage trades, and local bonds.

Today, market optimism is similarly high. According to reports, a gauge tracking returns on local-currency emerging market bonds is heading for its best year in six. HSBC’s quarterly survey of 100 investors (who collectively manage $423 billion) in September found that 61% of respondents were net overweight EM local currency bonds, compared to -15% in June.

Anthony Kettle, senior portfolio manager at RBC BlueBay Asset Management in London, said:

“As the year-end approaches, some investors may look to lock in gains on their successful 2025 trades, which could raise volatility in FX markets.”

Asian Tech Stocks: A Warning

This month, Asian stock traders experienced firsthand the risks of extreme valuations and crowded trades. AI-related stocks that had been soaring suddenly plunged; while tech stocks globally have faced a selloff, analysts warn the risks are especially pronounced in certain Asian markets where tech has a high index weighting.

A striking example is South Korea’s Kospi index, which was the world’s best-performing major stock index in 2025 with a 70% surge. However, as volatility spiked, the index tumbled over 6% in a single session before clawing back half the losses. “Korea’s AI-memory trade positions are extremely crowded,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore.

After the selloff in tech stocks, Rohit Chopra, New York-based EM equity portfolio manager at Lazard Asset Management, has turned cautious. He pointed out:

“From a factor perspective, low-quality companies have been outperforming high-quality peers. Historically, such divergences don’t last, suggesting that if positions remain concentrated, a reversal could be imminent.”

Currency Carry Trades Under Pressure

Currency carry trades, among the most lucrative this year, are also starting to show signs of strain. Take the Brazilian real: its carry trade returns are up about 30% this year. Yet options traders seem to be shifting bearish, with the 3-month risk reversal metric—which gauges market sentiment—hitting a four-year high earlier this month.

Alvaro Vivanco, head of FX strategy at TJM, said the real is a classic example of a top-performing asset now crowded with positions, while renewed fiscal concerns in Brazil are another reason for caution.

Other Latin American currencies face similar dynamics. Wells Fargo’s McKenna noted that the peso in Chile, Mexico, and Colombia also “looks a bit expensive.” According to BIS data, the Colombian peso’s trade-weighted value is at its highest in seven years, exceeding its 10-year average by a full standard deviation; the Mexican peso is 1.4 standard deviations above average.

Likewise, Hungary’s forint has posted a 27% return in USD carry trades this year, among the standouts in emerging markets. Its rally accelerated partly due to markets betting that Prime Minister Viktor Orban—who has been in power for 15 years—could be ousted in the next election. ING Bank NV strategists Chris Turner and Francesco Pesole wrote in a recent outlook:

“If the current government remains in power, markets may question existing long FX positions, putting downward pressure on the forint.”

Frontier Markets: Liquidity Risks Loom

As investors pulled back from US assets this year, some frontier market bonds have benefited. Now, asset managers including Fidelity International are sounding warnings about these markets.

“To me, it’s more worrying when a ‘sudden rush for the exit’ could overwhelm the base of natural buyers in these trades,” said Fidelity portfolio manager Philip Fielding. He added that markets like Egypt, Côte d’Ivoire, or Ghana “may also lack liquidity” during volatile periods. Data shows Fielding’s fund returned about 12% over the past three years, outperforming 84% of peers.

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