HSBC reports a robust start for Emerging Markets in 2026, noting the MSCI EM index increased by around 11% in USD terms. In comparison, the MSCI US index achieved a modest 2% rise. This growth is linked to improvements in regional narratives and company fundamentals, aided by a decline in the US Dollar.
Emerging Markets are performing better than US stocks in 2026, with the dollar weakness acting as a catalyst for appealing structural stories and profits. There is indication that global interest in dollar assets has cooled, contributing to the acceleration of the EM momentum trend.
Impact Of Structural Reforms
Some specialists in Emerging Markets suggest that structural reforms and the potential for lower interest rates may positively impact fiscal outlooks. These factors are contributing to the overall positive performance of Emerging Markets at this time. The report suggests that shifts in regional dynamics and currency changes are central to this development.
Given the strong performance of Emerging Markets and the concurrent weakness in the US Dollar, we should position for this divergence to continue. This involves exploring strategies that favor EM indices over their US counterparts. This momentum is accelerating, creating opportunities for those who can act quickly.
One direct approach is to buy call options on major EM exchange-traded funds (ETFs) to capitalize on further upside. We are seeing significant capital inflows, with data showing over $15 billion flowing into EM-focused equity funds in January 2026 alone. Selling put options on these same ETFs can also be considered to collect premium, reflecting a bullish-to-neutral stance on the sector.
US Dollar Index Trends
The sharp fall in the US Dollar Index, which we saw drop from 94 to 92.5 last week, is a critical tailwind. Traders should look at buying put options on dollar-tracking ETFs or using currency futures to short the dollar against a basket of EM currencies. This acts as both a direct play on the trend and a hedge that enhances long EM equity positions.
Simultaneously, the sluggish 2% gain in US markets suggests a defensive or bearish stance is warranted there. Buying put options on the S&P 500 could serve as an effective hedge against a potential US downturn or continued underperformance. With the VIX hovering around 14, premiums on these puts are relatively inexpensive protection.
This market environment is reminiscent of what we observed looking back at the end of 2023, when a dovish shift from the Federal Reserve weakened the dollar and ignited a rally in international assets. The recent commentary from the Fed’s January 2026 meeting suggests a similar pause in tightening, reinforcing the fundamental case for this EM outperformance cycle.
