Emerging markets set to outperform US stocks as dollar weakness continues, Cambridge says

Global investors should consider reducing their US equities exposure as emerging market stocks are on track to outperform those in developed nations for the first time in five years amid a weakening US dollar, according to global investment firm Cambridge Associates.\nThe recommendation comes as the dollar has experienced significant weakness this year, falling by 10 per cent at one point after a decade-long bull run that started in 2011.\nHowever, the greenback still remains 29 per cent above its median real valuation. “We expect the dollar to decline further in 2026”, beginning a multi-year bear market, Boston-based Cambridge said, citing headwinds from uncertainty in economic policy, overvalued assets, and fiscal pressures that could dampen global demand for the US dollars.\nThe weaker US dollar has benefited international stocks. Global non-US equities outperformed US equities by 6.6 percentage points in local currency terms in 2025, and by 13.9 percentage points in US dollar terms.\n\nCambridge expected this trend to continue and recommended that investors be overweight in global non-US equities in 2026.\nLatin America, which has been an underappreciated market for many years with valuations near 20-year lows, was the stand-out performer in emerging markets, with a 37 per cent year-to-date return on equities. The region was expected to offer further outperformance potential, supported by deeply discounted equity and currency valuations and improving macroeconomic conditions, the report said.\nThe heavy reliance on tech stocks to the performance of US markets made them vulnerable, according to Cambridge. The exposure of US equities to a narrow slate of sectoral drivers, particularly in artificial intelligence, increased the risk of a weaker dollar and a pullback by overseas investors if the AI theme waned, Cambridge warned.\nThe cyclically adjusted price-to-cash-earnings ratio for the MSCI USA index, a widely used measure of market valuation, was 2.19 times higher than the MSCI Developed Markets index (ex-US), representing a 50 per cent premium to its long-term median.\nThe Trump administration is also preparing to appoint a new Federal Reserve chair. “Regardless of who chairs the Fed, lower interest rates and a weaker US dollar are a stated goal of the Trump administration to help narrow the US trade deficit and spur a revival of US industry,” the report said.\n\nFidelity echoed Cambridge Associates’ views. The Asian market was expected to grow next year, benefiting from the weaker dollar and an AI investment cycle that could last for years, Matthew Quaife, global head of multi-asset investment management at Fidelity International, said last week.\n“We think the dollar will remain relatively stable but tend to weaken through 2026. That environment will look favourable for Asian markets,” he said.\n“International investors are coming back to China. The macro backdrop is stabilising, and the rapid improvement in the AI cycle is drawing global attention again,” Quaife added. “Even with the recent pullback, this is quite a good opportunity to increase exposure to Chinese tech.”\n