Emerging markets are attracting a fresh wave of investor interest as a weakening US dollar and competitive yields create ideal conditions for capital inflows. This shift is sparking a new cycle of opportunity for global investors looking beyond developed markets in search of returns and diversification.
The US dollar’s retreat, dropping over 8% this year, has reshaped the carry trade landscape. Once dominated by the yen and Swiss franc, the dollar is now a preferred funding currency as investors borrow in dollars to invest in higher-yielding assets abroad. The greenback’s fall below the 100 level on the dollar index marked a psychological shift, triggered by slowing US growth expectations, dovish monetary policy signals, and global investors turning cautious on US Treasuries.
This dynamic has significantly benefitted emerging market bonds and currencies. The Brazilian real, for example, offers a 9% yield advantage, despite its volatility. Currencies like the Indonesian rupiah and Indian rupee are also attracting capital due to their relative stability and yield premium. In April alone, nearly \$9 billion flowed into emerging market debt, with South Korea receiving close to \$8 billion in foreign bond investments—reflecting growing confidence in Asia’s economic resilience.
India’s stock market is once again drawing foreign investors with momentum building through May’s \$5.5 billion in block trades—the highest monthly value in almost a year. This was a sharp reversal from April’s muted \$220 million, driven by improving valuations and investor optimism around India’s fundamentals. The Nifty 50 has gained 6% since early April, buoyed by the easing of US tariff tensions and renewed institutional buying. India’s appeal lies not just in numbers but in its positioning as a strategic alternative to China amid geopolitical shifts.
Hedge funds are increasingly targeting sector-specific opportunities across emerging markets. At this year’s Sohn Conference in Hong Kong, themes included Chinese tech innovation, Indian pharmaceuticals, and South Korean infrastructure. Baidu’s Apollo Go unit, for example, is projected to command 15% of a \$237 billion autonomous driving market by 2034. Meanwhile, firms like MedPlus Health Services and Piramal Pharma are being highlighted as key players in India’s growing healthcare ecosystem.
There’s a broader recalibration in global portfolios under way. US equities, weighed by debt ceiling debates and slowing economic data, are no longer the default. The MSCI All-Country World ex-US index has posted a 14% return year-to-date, while the S\&P 500 has remained relatively flat. With fiscal stimulus ramping up in Europe and China and the dollar under continued pressure, investors are reallocating capital towards regions offering better relative value.
The combination of currency tailwinds, strong yields, and deepening capital markets is enhancing the investment case for emerging economies. These regions are not only benefitting from a reawakening of carry trades but also from a growing appetite for growth-focused equity exposure. For investors seeking diversification and yield in an increasingly uncertain developed world, emerging markets offer compelling upside.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
