Emerging markets (EM) are entering 2026 on a high note, following a stellar performance in 2025 despite global economic turmoil, trade wars, and U.S. tariff policies. Analysts and investors are optimistic that the combination of fiscal discipline, central bank credibility, and structural reforms across EM economies could drive continued growth, potentially making 2026 another banner year for these once-risky markets.

Exceptional 2025 Returns for Emerging Markets

In 2025, emerging market stocks surged by 26%, while local currency bonds returned 18%, highlighting a remarkable rebound from years of volatility. Investor confidence was fueled by diversification strategies, as capital moved away from U.S.-dominated assets toward global exposure. According to Elina Theodorakopoulou, Managing Director at Manulife Investment Management, the year’s EM performance was “marvellous and glorious,” driven by a mix of sound policies and good fortune.

How Emerging Markets Withstood Global Shocks

Contrary to expectations, emerging economies demonstrated resilience amid political and economic instability in the U.S. and Europe, as well as rising geopolitical fragmentation. The return of Donald Trump to the White House introduced policy uncertainty, yet erratic U.S. tariffs and attacks on the Federal Reserve inadvertently highlighted EM stability.

Investors took advantage of dips in emerging market assets triggered by these uncertainties. Thomas Haugaard, Portfolio Manager at Janus Henderson Investors, noted that many EM debt instruments were under-owned after years of outflows, creating opportunities for strategic purchases.

Country-level reforms also contributed to strong performance:

• Turkey pivoted to orthodox economic policies in mid-2023
• Nigeria scrapped subsidies and devalued the naira
• Egypt continued IMF-backed reforms
• Ghana, Zambia, and Sri Lanka endured defaults but saw credit upgrades

These measures reversed years of investor hesitation, strengthening confidence in EM resilience heading into 2026.

Strong Fundamentals and Credit Upgrades

Emerging markets have benefited from improving fundamentals, including ongoing sovereign credit upgrades. Morgan Stanley strategist James Lord emphasized the growing momentum of credit upgrades, which signals robust economic and fiscal stability. Giulia Pellegrini of Allianz Global Investors added, “They’re able to withstand bigger hits. Their economies are on stronger footings,” highlighting the improved resilience of EM economies.

Prudent monetary policies have also boosted investor confidence. Charles de Quinsonas, Head of Emerging Market Debt at M&G, noted that EM central banks have demonstrated high credibility by implementing careful interest rate adjustments, maintaining currency stability, and avoiding overcuts, which has further fueled investor interest in local currency bonds.

Emerging Markets as the New Safe Havens

Emerging market currencies have outperformed despite a weakening U.S. dollar, attracting significant capital inflows into local currency debt. Analysts predict that returns in 2026 could again reach double digits, bolstered by continued fiscal discipline and strong central bank action.

Even amid elections in countries such as Hungary, Brazil, and Colombia, which historically introduce market volatility, investors see opportunities for strategic positioning. Pellegrini commented that potential policy changes following elections could generate market moves that create opportunities for EM investors.

Risks and Cautions

While optimism is high, EM markets are not without risks. A U.S. recession could trigger capital retrenchment, while Federal Reserve rate hikes could strengthen the dollar and pressure EM currencies. Additionally, the appointment of a new Fed chair in 2026 introduces uncertainty.

However, analysts argue that EM economies are now less sensitive to U.S. shocks than in previous decades. HSBC’s December survey found that bearish sentiment on EM prospects has vanished, with net sentiment at record highs. David Hauner, Head of Global EM Fixed Income Strategy at Bank of America Global Research, cautioned that “history suggests that you have to be cautious when everybody agrees on the direction of the market,” signaling that exuberant optimism could be a contrarian warning.

Outlook for 2026

Looking forward, emerging markets are well-positioned to continue delivering strong returns for investors seeking global diversification, yield opportunities, and exposure to high-growth economies. Key factors driving 2026 performance include:

• Continued monetary policy credibility
• Further sovereign credit upgrades
• Structural reforms and fiscal discipline
• Strategic positioning amid geopolitical uncertainty

For investors seeking alternative growth outside the traditional U.S. and European markets, EM assets—both stocks and local currency bonds—remain compelling options in 2026, potentially continuing their marvellous comeback story.