International investors are now allocating funds to emerging market (EM) assets at the fastest pace seen in years. The primary drivers behind this major financial momentum are a weaker United States dollar alongside a growing desire among global investors to diversify their portfolios away from the US market.
Unsurprisingly, this broad shift has caused emerging market assets to rise sharply across the board. Over the past year alone, the MSCI EM Index has climbed by an impressive 47 per cent. This rapid ascent has clearly outpaced the 24 per cent increase seen in the benchmark index tracking developed markets over the same period.
Tangeni Shatiwa, an economist at the Finnish development financier and impact investor Finnfund, believes that investing in emerging markets is currently highly attractive. Shatiwa notes that many of Finnfund’s specific target markets are actively projected to grow at a faster rate than advanced economies in the coming years. He emphasizes that even in the event of a severe global recession, emerging markets today are significantly better protected against external shocks than they have been in the past.
Currency shifts and geopolitical catalysts
The broader global financial landscape reflects this rapidly shifting dynamic. Several emerging market currencies, including the Ghanaian cedi and the South African rand, have recently strengthened by more than 10 per cent against the dollar. According to the Finnfund analysis, this trend has been actively accelerated by the volatile economic policies characterizing Donald Trump’s second term in office. Shatiwa points out that this environment creates significant potential for further capital inflows, as global portfolios actively seek necessary diversification after a prolonged period of heavy concentration in the United States. He considers this development highly encouraging for emerging markets worldwide.
The debt and commodity advantage
Historically, movements in the value of the dollar have served as a key, reliable driver of capital flows into emerging economies. Since the 1970s, every pronounced period of US dollar weakness has reliably fueled clear outperformance in emerging market investments. If the dollar continues its current weakening trajectory, emerging market investments stand to gain significantly.
Shatiwa explains that while many emerging market governments have increased borrowing in their own local currencies in recent years, a substantial amount of dollar-denominated debt remains on their ledgers. A weaker dollar inherently makes servicing that existing debt much more affordable for these nations. Furthermore, a weaker dollar actively boosts revenues generated from commodity exports, as international trade is largely priced in dollars. This dynamic directly benefits the many emerging economies that depend heavily on these crucial export revenues.
Attractive valuations and the AI boom
Beyond the shifting currents of capital away from the US, the fundamental valuations of these international assets remain highly attractive to investors. Currently, the MSCI EM Index is trading at roughly a 40 per cent discount relative to the US S&P 500 Index. Shatiwa highlights that if American technology companies ultimately achieve the soaring earnings expectations promised by artificial intelligence, the exact same growth logic applies to emerging market technology firms, particularly those based in Asia. Consequently, investors can gain lucrative exposure to the same global megatrends at a significantly lower price point.
While investing in emerging markets inherently carries more risk than investing in developed economies, Shatiwa argues that the current level of risk is distinctly lower than before. In recent years, middle-income countries across Latin America and Asia have deliberately strengthened their domestic institutions and increased their foreign exchange reserves to effectively shield their economies from global financial turbulence. This careful preparation is especially critical when assessing the potential severity of the economic fallout from the recent breakout of the Middle East conflict, an event whose long-term impact remains highly uncertain.
Following the successful lead of Latin America and Asia, many African nations—such as Ghana, Nigeria, and South Africa—have implemented strategic reforms designed to enhance their overall economic resilience. Shatiwa reminds investors that emerging markets firmly demonstrated this newfound resilience during the global inflation spike of 2022. During that highly volatile period, many emerging market central banks took decisive action, raising their policy rates well before the US Federal Reserve and the European Central Bank in a successful effort to curb mounting price pressures.
