Global investors poured money into emerging market stocks at the fastest clip in years in January, as a weaker dollar and diversification away from the U.S. point to an extension of the rally the asset class staged last year.
Emerging market equity funds last week posted one of their biggest weekly inflows on record, lifting year-to-date inflows above $39 billion, according to J.P. Morgan. That marks one of the strongest starts to the year for EM equities in more than 20 years, the investment bank said, and has historically been associated with sustained rallies rather than brief bursts of optimism.
Latin American equity funds recorded their strongest weekly inflows on record. Some fund managers say the shift reflects a rare alignment of macro and fundamental signals - in particular, currency dynamics and stabilizing earnings expectations.
The U.S. dollar fell more than 9% last year against a basket of developed-nation peers (.DXY), opens new tab while the EM currency index (.MIEM00000CUS), opens new tab added more than 7%, the most since 2017, and expectations for continued weakness in the greenback are pushing investors further into other geographies. The S&P 500 (.SPX), opens new tab rose 16.4% last year and the EM index (.MSCIEF), opens new tab was up 30.6%.
The dollar has been a headwind for EMs for years, according to Varun Laijawalla, an emerging market equity portfolio manager at Ninety One. "Last year you saw a break in that trend, and that changes the backdrop for emerging markets," he said.
Some investors said the pattern of inflows also points to a more selective approach than in past EM rallies, with buyers focusing on individual countries rather than treating emerging markets as a single trade. "What's really standing out this time is how much investors are using single-country emerging market ETFs," said Dina Ting, head of global index portfolio management at Franklin Templeton.
That selectiveness reflects wide performance gaps across countries, and a view that macro and policy conditions now matter more at the national level than in recent years, investors said. They are also focusing on tighter central bank discipline in some larger emerging economies such as South Korea and Brazil and stronger constraints on government spending, compared with the U.S.
"If I want policy orthodoxy and fiscal responsibility, I go to EM, not DM," said James Athey, a fund manager at Marlborough in London. Some developed countries are spending as if their economies need support, increasing longer-term risks, he said.
The dollar's multi-year lows have been driven in part by investors reassessing Washington's policy direction and geopolitical risks, including President Donald Trump's tariff threats and his administration's pressure on the Federal Reserve's independence.
"I find it hard to believe that the U.S. as an asset class could carry an extra premium when you have so much going on," said Jorry Noeddekaer, head of Polar Capital's emerging markets and Asia team. A softer dollar can lift emerging market corporate profits by easing financing costs and supporting domestic demand.
