Wall Street believes: In 2026, emerging markets will still be in a bull market!

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Major Wall Street investment banks predict that, driven by a weaker US dollar and explosive growth in artificial intelligence investment, emerging market assets will continue to perform strongly into 2026.

As the US economy slows, the market generally expects more Federal Reserve rate cuts, which has become the core logic supporting emerging markets. Morgan Stanley predicts that by mid-2026, the return on emerging market assets could reach around 8%.

BofA and Goldman Sachs, among other institutions, are also optimistic and predict the dollar will weaken, creating a favorable environment for emerging market assets. BofA strategists expect the return on local currency emerging market bonds to exceed 10% next year, with the Turkish lira and Brazilian real listed as top choices for carry trades.

In addition, J.P. Morgan believes that massive capital expenditure plans announced by companies in the AI sector will have a positive impact on emerging markets. These positive factors are expected to add further momentum to this year’s rally.

So far this year, local currency emerging market bonds have already delivered a 7% return for investors, marking the best performance since 2020, and a related currency index is up over 6%.

Dollar Weakness Provides Crucial Support

The expectation of continued gains in emerging markets is largely based on a shift in Federal Reserve monetary policy and a weakening dollar.

James Lord, Head of Emerging Markets FX Strategy at Morgan Stanley, stated:

Federal Reserve rate cuts will put downward pressure on the dollar. This helps push down US Treasury yields and creates a favorable environment for emerging markets.

The boost from US dollar depreciation to emerging market currencies has already been validated this year.

According to an index tracked by Bloomberg, returns on eight emerging market carry trades funded by shorting the dollar have risen over 12% this year, the strongest performance since the global financial crisis.

BofA and Goldman Sachs both predict the dollar will weaken further. In a report led by BofA strategist David Hauner, the team noted:

BofA’s baseline scenario expects a weakening dollar, falling rates, low oil prices, and a moderate rise in equities.

However, BofA also cautions that volatility could be higher than in the past six months. The team warns:

History shows that risk premiums rarely stay this low for an extended period.

AI Investment Boom Spills Over to Emerging Markets

In addition to favorable macro monetary conditions, the huge capital spending in the AI sector is another strong support endorsed by Wall Street.

According to J.P. Morgan’s forecast, US AI-related capital expenditures will reach $628 billion by 2028, and that impact will be transmitted to emerging markets through exports of technology products and rising metal prices.

The team led by J.P. Morgan strategist Luis Oganes stated that they remain bullish on emerging market currencies and local currency bonds, and expect emerging market bond funds to see inflows of $40 billion to $50 billion next year.

The team wrote in its report:

We see that improved market sentiment and structural underweighting by investors in emerging market assets will jointly drive fund inflows.

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