2 February 2026
Emerging market stocks have gotten off to an exceptionally strong start in 2026 – with the MSCI EM index up by around 11% in USD terms, versus just 2.0% for the MSCI US. In some ways, it’s a case of history repeating. This time last year, a sharp decline in the US dollar was under way, and EM stocks were strengthening just as US stocks were fading. After the volatility around April’s ‘Liberation Day’ tariff surprise, EM markets went on to outperform the US for the full year.
Amid further signs that global investors have cooled towards dollar assets – with the dollar itself falling sharply last week – the EM momentum trend is accelerating. But unlike last year, there is more to this outperformance than EMs just being lucky. Improvements in both regional structural stories and company fundamentals are playing a role too.
Beneath the surface, there have been some breathtaking moves. One is in South Korea, where stocks have continued last year’s world-beating, near-100% gains, with a further 28% rise in January. That’s been driven by strong gains in some of the country’s large-cap tech stocks, which are closely allied to the global AI build-out. Corporate governance reforms and government support for the tech sector have also attracted foreign inflows. Taiwan – another EM tech powerhouse – has also seen double-digit gains. Another is in Brazil, where the market is up 21% last month. Some EM specialists point to structural reforms and the prospect of lower rates providing relief to the fiscal outlook as positives. Investor flows have surged, and Brazil’s mining sector has been well-placed to benefit from the current commodities rally.
Overall, EMs are proving again in 2026 that they can be both lucky and good, with the tailwind of dollar weakness acting as a catalyst for attractive structural stories and improving fundamentals and profits.
Last year’s volatile backdrop of policy uncertainty, trade tensions, and a rotation of market performance from the US to Europe and Asia proved to be ideal conditions for hedge fund managers – with industry data showing that they delivered some of their strongest returns since 2009.
According to some hedge fund specialists, the current environment remains fertile for the asset class. In particular, the broadening out of stock markets and a further fading of US exceptionalism are keeping market dispersion high. And that sets the scene for what they describe as “idiosyncratic alpha” on both the long and short side. In terms of hedge fund sectors, this could be good news for both equity long/short and market neutral strategies. Meanwhile, macro and credit strategies could benefit from the uncertain rates outlook, event-driven could be well-positioned for a pick-up in mergers and acquisitions deal activity, and managed futures could also be useful in portfolios given their downside protection and near-zero market correlation characteristics.
Given the expectation of episodic volatility in markets this year, and the need for investors to consider “bond substitutes” in portfolios, the positive outlook for hedge funds is welcome news.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 30 January 2026.
The Fed left rates unchanged at its January meeting, opting to assess how multiple shocks – trade tariffs, an immigration clampdown, an AI investment boom and a government shutdown – pass through the economy. Thus far, the net result has been surprisingly resilient growth, but the headline strength masks some imbalances. K-shaped dynamics remain in play and are most evident in capex – AI related investment is booming while other capex remains weak. |
On the consumer side, strong spending has relied on a sharp fall in the saving rate, offsetting soft income growth. The sense is that wealthier households are driving spending while those reliant on labour income are being squeezed. Consumers in general may not “feel the vibe” of headline economic resilience. AI may be boosting growth, but it could also be undermining perceived job security, creating a “vibecession”. While US growth is likely to hold up in 2026 – a key reason to remain pro-risk in portfolios – consumer and labour developments require careful monitoring.
For EMs, the biggest selling pressure comes when both the yen and the dollar are strengthening. But with EM currencies gaining against the dollar last week, the incentive to unwind yen-funded positions is reduced. Nonetheless, it’s a reminder that global investors should be wary of the impact of Japanese market volatility.
On top of this, an ongoing boom in debt issuance by tech hyperscalers seeking to fund the AI build-out (including mega-cap companies with strong credit ratings) is also boosting overall IG credit quality. While higher tech and AI exposure in the IG index could potentially overlap with similar tech exposure in equities, the overall IG asset class remains a compelling – and increasingly good quality – portfolio diversifier.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 30 January 2026.
Source: HSBC Asset Management. Data as at 7.30am UK time 30 January 2026. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.
Risk markets continued to rally last week, with broad gains across EM stock indices, including those in Asia and Latin America, as the US dollar index softened further. In commodities, both precious and industrial metals prices rallied but largely pared their gains over the week, while oil prices rose amid lingering geopolitical tensions. 10-year US Treasury yields increased modestly, with the Fed keeping policy rates unchanged and Chair Powell noting that the US economic outlook has “clearly improved”. Meanwhile, JGB yields retreated mildly, alongside lower European sovereign yields, while spreads on US and European high-yield credits widened. Across DM equities, the S&P 500 reached an all-time high amid mixed Q4 US corporate earnings. Conversely, the Euro Stoxx 50 fell, as did the German DAX. Elsewhere, Nikkei 225 also slid following a stronger yen.
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