Emerging markets (EMs) have largely defied pressure from tariffs, trade wars and global turmoil to notch up stellar double-digit returns in 2025, and investors are hopeful that the resilience they showed could lead to repeating this performance next year as well.
Years of painful fiscal choices and central bankers who made all the right calls have left once-risky countries looking solid in the face of political and economic clouds in the U.S. and Europe, and rising geopolitical fragmentation.
"There are a lot of tailwinds that we can take from this year transferring to next year, particularly because of how marvellous and glorious the performance has been," said Manulife Investment Management managing director Elina Theodorakopoulou, highlighting "a combination of good policies and good luck."
U.S. President Donald Trump's return to the White House ushered in the type of uncertainty that typically has investors fleeing to save havens such as U.S. Treasuries or the dollar.
Erratic U.S. tariff policies and Trump's attacks on Federal Reserve (Fed) policymakers have flipped the script, making emerging markets look steadier.
While for many investors the fallout from U.S. policy still tops the list of risks to next year's anticipated rally, some used the asset dip triggered by Trump's "Liberation Day" tariff announcements in April to scoop up emerging market assets.
"You've increasingly seen investors diversifying out of the U.S. or generally seeking to have global diversification," said Thomas Haugaard, portfolio manager at Janus Henderson Investors.
Emerging market debt was under-owned after years of outflows, Haugaard added.
There have been some major changes at the country level, too.
Türkiye pivoted to orthodox economic policies mid-2023, Nigeria scrapped subsidies and devalued the naira, Egypt continued IMF-backed reforms, while Ghana, Zambia and Sri Lanka endured defaults and earned upgrades.
The resulting rally helped reverse years of investor cash outflows. Investors say the tough choices many emerging market governments made paid off, paving the way for strength in 2026.
"They're able to withstand bigger hits. Their economies are (on) stronger footings," said Giulia Pellegrini of Allianz Global Investors.
Analysts also point to another year of net credit rating upgrades as proof that resilience can continue.
"Fundamentals are improving in that asset class, certainly when you look at it from a sovereign credit perspective," said Morgan Stanley strategist James Lord.
"There is a growing momentum of credit upgrades in emerging markets year-on-year," he added.
While the Fed has come under attack, emerging market central banks have shown independence and solid policymaking, investors said.
"When it comes to monetary policy, credibility is probably as high as it has ever been in EM," said Charles de Quinsonas, head of emerging market debt at M&G.
"They cut, actually ahead of the Fed as well, but they haven't overcut, which has helped currencies to remain quite resilient," he added.
And prudent monetary policy helped emerging market currencies outperform, all while the dollar wilted.
This was a strong driver of investor interest for local currency debt across emerging markets, which brought returns of around 18% this year. Investors such as Pellegrini of Allianz said they could hit double digits again in 2026.
Even uncertainty around elections, from Hungary to Brazil and Colombia, that could often make investors nervous, instead spells opportunity for some.
"The ensuing potential small policy changes that come on the back of that ... are actually potential market moves that would generate opportunities for us," Pellegrini said.
The biggest risk remains the U.S.
If it enters a recession, a capital retrenchment would hurt emerging markets. And if the Fed hikes rates, it could bolster the greenback and stymie emerging market local currency strength. The appointment of a new chair to the world's top central bank in 2026 is adding to uncertainty.
But even this does not pose the risk it once did.
"Fundamentally, (emerging markets) are much less sensitive economically to the U.S. than they ever were," said Quinsonas.
If anything, it is the exuberant optimism that is making analysts think twice.
HSBC's emerging market sentiment survey published in December found bearish views on emerging markets' prospects had entirely disappeared, with record net sentiment at the joint highest in the history of the survey.
David Hauner, head of global emerging markets fixed income strategy at BofA Global Research, said he had not encountered a single client that was negative on emerging markets despite speaking to more than 100 in recent weeks.
"Everybody is constructive, so this could be a negative signal," said Hauner, adding: "History suggests that you have to be cautious when everybody agrees on the direction of the market."
