Macro
Emerging Markets: The Quiet Decoupling From the Dollar
Jan 25, 2026 · 19 min read · Winvestor Analyst Team
EM equity performance has historically lived or died on the U.S. dollar. Over the past three years, that relationship has weakened materially. We think structural — not cyclical — factors are at work.
The old playbook
From 1995 to 2020, a strong dollar was reliably bad for EM equities and a weak dollar was reliably good. The mechanism: EM corporates and sovereigns funded heavily in USD, so dollar appreciation tightened financial conditions across the developing world.
What changed
EM sovereign and corporate debt has shifted decisively toward local currency funding. The USD share of EM external debt has fallen from 75% in 2010 to roughly 55% today. Domestic capital markets in Brazil, India, Mexico, and Indonesia have deepened to the point where most large corporates can issue meaningful size locally.
Central bank credibility has improved markedly
EM central banks were ahead of the Fed in both starting and pausing the 2022-23 hiking cycle. Brazil, Mexico, Chile, and Indonesia all began cutting before the Fed, with stable currencies — something unthinkable in prior cycles. Inflation expectations across the major EM economies have re-anchored at lower and more stable levels. The result is a lower equity risk premium that has not yet fully shown up in EM equity multiples.
The China question
Index-level EM performance has been weighed down by China's prolonged property unwind and policy unpredictability. Stripping China out, the rest of EM has performed broadly in line with developed markets over the past three years. For investors willing to take active country views, the EM-ex-China composition is significantly more attractive than headline EM indices suggest.
Investment implications
EM equities can now perform reasonably well in periods of dollar strength — something that would have been unthinkable a decade ago. For U.S. dollar-based investors, that opens the door to strategic EM exposure without the historical drag of dollar cycles. We have raised our recommended EM weighting from 5% to 8% of a global equity allocation.
Where we focus
We prefer countries with credible inflation-targeting central banks, current account discipline, and reasonable equity valuations: India, Mexico, Indonesia, and select Gulf names. We remain cautious on heavily commodity-dependent markets and on geographies with deteriorating governance.
Implementation considerations
Vehicle selection matters more in EM than in DM. Broad EM ETFs include meaningful weights to state-owned enterprises with poor governance. Country-specific or active strategies typically deliver materially better risk-adjusted returns. For most allocators we recommend a barbell: a core position in EM-ex-China supplemented by targeted single-country exposure where conviction is highest. Currency hedging is generally not worth the cost given the structural improvement in local funding.