A sliding greenback, bargain valuations and renewed risk appetite power a 28% year-to-date surge in MSCI’s emerging-markets benchmark as global investors snap up assets from Seoul to São Paulo.

Investors are racing back into the developing world. With the U.S. dollar sliding and valuations still a discount to Wall Street, emerging‑market equities have surged into their strongest run since the global financial crisis. MSCI’s benchmark for emerging stocks is up about 28% so far in 2025—its biggest year‑to‑date gain over the same period since 2009—as buyers snap up assets from semiconductors in North Asia to banks and commodity producers across Latin America.

The speed of the rebound has surprised veterans of the asset class. After years of false dawns, this year’s advance has been broad and, crucially, underpinned by macro tailwinds. A weaker dollar—following the Federal Reserve’s pivot to rate cuts and softer U.S. data—has eased the pressure on countries that borrow in dollars and boosted the appeal of local‑currency assets. Lower servicing costs and stronger domestic currencies tend to attract fresh capital, historically acting as rocket fuel for EM rallies.

Flows are starting to catch up with price action. Fund‑tracker EPFR reports multi‑week highs in allocations to EM equity funds since late summer, with anecdotal evidence of global multi‑asset portfolios rotating out of U.S. mega‑caps into cheaper cyclicals abroad. ETF proxies tell a similar story: the iShares MSCI Emerging Markets ETF has climbed roughly 25%–29% year to date, outpacing most developed markets ex‑U.S., even as investors remain underweight the asset class by historical standards.

Beneath the headline surge sit three interlocking drivers. First, valuation: EM price‑to‑earnings multiples remain materially below those of the U.S., even after adjusting for sector mix. Value‑tilted baskets in EM still trade at single‑digit forward P/Es in several markets, offering income and free‑cash‑flow yields that screen attractively against developed‑market peers.

Second, policy: a handful of large EM central banks started cutting policy rates well ahead of the Fed. Brazil and Chile led with cautious easing cycles, while South Africa and Indonesia followed with prudence aimed at anchoring inflation expectations. Where inflation has proved sticky—think Turkey—high real rates are attracting carry traders and local investors alike. On the fiscal side, governments from Mexico to India have rolled out targeted incentives to pull in foreign direct investment tied to supply‑chain diversification and energy transition.

Third, earnings: North Asia’s technology complex has roared back. In Taiwan and South Korea, chipmakers and suppliers tied to artificial‑intelligence data centers have posted double‑digit revenue growth, lifting index heavyweights and shoring up earnings revisions. At the same time, old‑economy cyclicals—miners in South America, banks in ASEAN—are benefiting from still‑resilient domestic demand and a gentler global rates backdrop.

Country stories are diverging in familiar and new ways. China remains the swing factor. Equities there have rallied off 2024’s depressed base on the back of incremental support for property markets and targeted stimulus for advanced manufacturing. Yet international investors remain selective, favoring export‑oriented firms and internet platforms with improving cash discipline over heavily indebted developers.

India continues to draw structural inflows as a beneficiary of global supply‑chain rewiring, a booming services sector and public‑capex‑driven infrastructure upgrades. Valuations are punchier than the EM average, but earnings momentum has held up—particularly for private‑sector banks, industrials and software exporters. Meanwhile, in Latin America, Mexico’s near‑shoring narrative is maturing, while Brazil’s rate‑cutting cycle and corporate governance reforms have improved sentiment toward local equities and credit.

In Southeast Asia, investors are watching Vietnam’s path toward potential index upgrades that could unlock billions in passive inflows. Elsewhere, Indonesia’s commodities ecosystem—from nickel to copper—continues to attract strategic investment tied to the global electrification cycle. In EMEA, South Africa’s utilities and financials have stabilized after years of load‑shedding turmoil, while the Gulf’s listings pipeline keeps deepening regional benchmarks.

The currency backdrop is doing a lot of the heavy lifting. The U.S. Dollar Index has retreated from last year’s peaks as traders price in a lower terminal rate and a softer growth outlook in the U.S., reducing the headwinds that battered EM assets in 2022–23. A benign dollar typically compresses external borrowing costs, improves terms of trade for commodity importers and supports equity multiples by lowering discount rates.

Risks still loom large. The rally’s durability hinges on a gentle landing in the U.S. and continued disinflation worldwide. A disorderly re‑acceleration of U.S. inflation—or a sharp growth slowdown—could rekindle dollar strength and force EM central banks to pause or reverse easing cycles. Geopolitical tensions remain a wild card for supply chains and energy markets. Domestically, reform momentum is uneven, corporate leverage pockets persist, and in some markets governance standards still warrant a valuation discount.

What, then, are investors doing? Active managers say they’re leaning into quality and balance‑sheet strength, pairing secular AI winners in North Asia with domestic‑demand stories in India and ASEAN. Allocators with value mandates are rotating into financials and materials where free‑cash‑flow yields remain robust. Bond investors are extending duration selectively in local markets where real yields are still elevated and disinflation looks entrenched, picking up carry even after recent price gains.

For latecomers to the rally, entry discipline matters. Veterans suggest phasing in exposure and stress‑testing portfolios for currency shocks. Dollar hedges, option overlays and diversified beta—via broad EM ETFs supplemented with country or sector tilts—are making a comeback among institutions wary of headline risk.

Even after a blistering run, the setup for emerging markets looks meaningfully better than a year ago. Earnings revisions have turned positive, the dollar is off its highs, and policy backdrops are, on balance, supportive. If flows continue to normalize from deeply underweight positions, strategists argue the cycle could have further to run—though no one is confusing 2025 with an all‑clear. For now, the message from prices is unmistakable: investors are once again paying attention to the world beyond the S&P 500.

Editor’s note: Market levels and macro context referenced are current as of October 7, 2025.