HSBC reports a strong start for Emerging Markets in 2026, highlighting that the MSCI EM index rose about 11% in USD terms. In contrast, the MSCI US index saw a modest increase of 2%. This growth is attributed to better regional stories and company fundamentals, boosted by a drop in the US Dollar.
Emerging Markets are outpacing US stocks this year, with dollar weakness creating favorable conditions for profitable opportunities. A decrease in global interest in dollar assets is contributing to the rise of EM momentum.
Impact of Structural Reforms
Experts in Emerging Markets believe that structural reforms and the possibility of lower interest rates could improve fiscal situations. These elements are key to the positive performance seen in Emerging Markets now. The report indicates that changes in regional dynamics and currencies play a significant role in this progress.
Given the strong performance of Emerging Markets alongside the weaker US Dollar, it’s wise to prepare for this trend to continue. This means exploring strategies that prioritize EM indices over US ones. The momentum is picking up, offering chances for those who react swiftly.
One effective strategy is to purchase call options on major EM exchange-traded funds (ETFs) to benefit from further growth. There has been a significant influx of capital, with over $15 billion entering EM-focused equity funds in January 2026. Another option is to sell put options on these ETFs to earn premium and reflect a bullish-to-neutral position on the sector.
US Dollar Index Trends
The recent drop in the US Dollar Index from 94 to 92.5 is an important factor in this landscape. Traders might consider buying put options on dollar-tracking ETFs or using currency futures to short the dollar against a range of EM currencies. This serves as both a direct investment in the trend and a hedge for EM equity positions.
At the same time, the sluggish 2% gain in the US markets suggests that a defensive or bearish approach may be prudent. Buying put options on the S&P 500 could effectively hedge against a potential US downturn or ongoing underperformance. Currently, with the VIX around 14, the cost of these puts is relatively low.
This market environment mirrors what we saw at the end of 2023, when a dovish shift from the Federal Reserve weakened the dollar and sparked a rally in international assets. Recent remarks from the Fed’s January 2026 meeting indicate a similar pause in tightening, supporting the case for continued EM outperformance.
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