Kiss the US dollar as you know it goodbye

Signs are emerging that the United States dollar has entered a new cycle, which could see the greenback become less dominant, thereby benefiting emerging-market currencies like the rand.

This has changed the investment case for emerging-market equities, which had fallen out of favour for over a decade but are now seeing a resurgence.

Ninety One portfolio manager Varun Laijawalla and investment director Jen Ford outlined the conditions shaping the performance of emerging-market equities in the asset manager’s recently released Taking Stock Publication for Autumn 2026.

Laijawalla and Ford explained that the conditions that previously shaped the relative performance of emerging and developed market shares are changing, making these assets increasingly attractive.

This comes after emerging-market equities had a banner 2025, outperforming global equities and even the United States’ stock market.

South African equities did not miss out, with the JSE All Share having surged by up to 42% last year, recording its best annual performance in two decades.

According to Laijawalla and Ford, the outperformance of emerging-market equities in 2025 was more than just a flash in the pan, with these assets now seemingly entering a new era.

The asset class had been out of favour with investors for over a decade, with many considering it too risky, volatile, or simply substandard compared to the dominant US stock market. 

Laijawalla and Ford explained that one major headwind for emerging-market stocks over the past decade or so has been the exceptionally strong US dollar.

The greenback has historically had an inverse relationship with emerging-market equities, and the trade-weighted US dollar’s appreciation of about 40% over the past 15 years has put severe pressure on these stocks.

However, Laijawalla and Ford now say there are signs the dollar may have entered a new cycle, which could benefit emerging-market equities in the years to come.

The graph below, courtesy of Ninety One, shows the inverse relationship between the US dollar and emerging-market equities.

The US dollar’s new era

Laijawalla and Ford said the dollar’s new cycle has, at least in part, been driven by the US administration, which appears to see a weaker currency as a lever to help reset global trade.

“This matters for investors because dollar cycles are lengthy, lasting 18 years on average,” they said.

With the current cycle already having lasted for over 20 years, it appears as though the time has come for a new era. 

“If the dollar cycle has indeed turned, the headwind for emerging equities could turn into an ongoing tailwind,” they said.

Another factor driving the investment case for emerging-market stocks is that earnings at these companies are improving.

“Having bottomed in 2023, emerging-market corporate profits maintained positive momentum through 2024 and 2025,” said Laijawalla and Ford. 

“Emerging-market companies are forecast to deliver circa 30% to 35% earnings-per-share growth for FY2026.”

They said this is a positive indicator if historical relationships between earnings and stock-index returns hold true.

Adding to the case for emerging-market equities is the fact that valuations are currently supportive. 

Laijawalla and Ford noted that the relative value of emerging-market stocks compared to US equities is at a multi-decade low. “That indicates an advantageous starting point for an allocation,” they said. 

Historically, when emerging-market valuations have been in the top quintile (20%) of “cheapness” relative to US equities, emerging-market equities have, on average, outperformed US equities by more than 50% over the subsequent five-year period.

Laijawalla and Ford said South Africa should benefit from these positive trends materialising in emerging-market equities.

However, for investors looking to buy into emerging markets, they cautioned against focusing solely on South Africa or on only one market.

“Individual emerging markets and regions have very different characteristics and are subject to idiosyncratic impacts. Consequently, return dispersion across emerging-market countries can be wide,” they said.

“For those looking to access the opportunity, we think a broad emerging-market equity portfolio can be a more effective route.”

Ninety One analysed the monthly returns of different emerging-market equity portfolios over the past 10 years, as shown in the graph below.

This analysis found that blending emerging-market equities with a domestic equity allocation has historically been associated with improved returns and volatility characteristics relative to a standalone domestic portfolio.