The Structural Turnaround in Emerging Markets: A 15-Year Inflection Point?

The emerging markets (EM) asset class is undergoing a profound structural shift, one that could redefine global investment flows for a generation. After years of underperformance and skepticism, EM equities and debt are now positioned to outperform developed markets (DM) in 2026, driven by a confluence of factors: reduced net issuance, improved corporate governance, dollar weakness, and AI-driven commodity demand. This shift is not merely cyclical but structural, with implications that could extend well beyond 2026.

Reduced Net Issuance: A Drag No More

Historically, EM markets have been plagued by net issuance-index-level dilution from IPOs, ADR inclusions, and A-share listings-that eroded returns for investors. Between 2014 and 2024, EM investors achieved only 6% annual returns in local currency, far below initial forecasts of 15% according to analysis. However, this drag has eased significantly. By 2026, rolling five-year net issuance in China, a key EM bellwether, had dropped to one-third of its 2020 peak. Corporate buybacks and improved governance have offset dilution, with many Chinese firms repurchasing shares at trough valuations. This structural improvement has enhanced revenue-to-return transmission, making EM equities more attractive to investors seeking capital appreciation.

Dollar Weakness: A Tailwind for EM Valuations

The U.S. dollar's decline in 2025-falling 10% in the first half alone-has been a critical catalyst for EM markets according to JPMorgan analysis. A weaker dollar reduces the cost of servicing dollar-denominated debt for EM borrowers and boosts the valuations of EM equities in U.S. dollar terms. According to JPMorgan, EM equities surged 35% in 2025, outperforming developed markets, partly due to dollar weakness. Bank of America (BofA) notes that the dollar's 8% decline in 2025 has buoyed emerging assets, with local-currency bonds and equities benefiting from improved investor sentiment according to BofA. This trend is expected to persist into 2026, as U.S. monetary policy remains accommodative and trade policy uncertainty wanes.

AI-Driven Commodity Demand: A New Growth Engine

Artificial intelligence (AI) is reshaping global economic dynamics, with EM economies uniquely positioned to benefit. BofA forecasts 2026 as the midpoint of an eight- to ten-year cycle of infrastructure upgrades to support AI workloads. This transition is driving demand for semiconductors, data centers, and critical minerals. For example, Texas Instruments has expanded production in North Texas to meet AI-driven semiconductor demand according to BofA research. EM nations, particularly in Asia and Latin America, are supplying the raw materials and manufacturing capacity for this AI supercycle. JPMorgan highlights that AI-related capex is boosting corporate earnings and reshaping industries, creating a virtuous cycle of growth and reinvestment.

Governance Reforms: A Foundation for Trust

Improved corporate governance is another cornerstone of EM's structural turnaround. JPMorgan notes that governance reforms in markets like Korea and Latin America are enhancing the appeal of EM equities. These reforms include stronger board accountability, transparency in earnings reporting, and fiscal consolidation. BofA adds that structural improvements in policy frameworks and credit quality are making EM debt more attractive to institutional investors. This shift is critical for long-term capital inflows, as global investors increasingly prioritize ESG (environmental, social, governance) criteria.

Valuation Metrics: EM at a Compelling Discount

Emerging markets are trading at a significant valuation discount to developed markets, offering a margin of safety for investors. According to RBC Global Asset Management, EM stocks are priced at a 35% forward P/E discount to DM equities-the largest gap in 15 years. For example, Alibaba trades at a 17x P/E for the next fiscal year, compared to Amazon's 29x P/E according to Yahoo Finance. Similarly, Hynix, a key supplier of AI memory chips, is valued at 6.6x P/E, versus Nvidia's 23.6x P/E according to Yahoo Finance. In debt markets, EM hard-currency bonds offer yield spreads that are tighter than historical averages, supported by strong technical demand and improved credit fundamentals according to Janus Henderson.

Strategic Implications for Investors

The structural turnaround in EM is not a fleeting trend but a multi-year reallocation of capital. JPMorgan forecasts up to $50 billion in inflows into emerging-debt funds in 2026, driven by high real yields and AI-driven growth. BofA's David Hauner, head of emerging fixed income, declares that "EM bears have gone extinct," reflecting a paradigm shift in investor sentiment according to Bloomberg. For strategic investors, this represents an opportunity to capitalize on undervalued assets with strong growth potential. EM equities and debt are underrepresented in global portfolios, leaving room for further appreciation as capital flows continue to reallocate away from overexposed U.S. large-cap equities according to JPMorgan analysis.

Conclusion: A 15-Year Inflection Point

The convergence of reduced net issuance, dollar weakness, AI-driven demand, and governance reforms is creating a rare inflection point for emerging markets. These factors are not isolated but interdependent, reinforcing a self-sustaining cycle of growth and capital inflows. As JPMorgan and BofA emphasize, the 2026 outlook for EM is not just about short-term gains but a structural re-rating of the asset class. For investors with a long-term horizon, the case for EM equities and debt has never been stronger.