Emerging market stocks are on track for their best August performance in over two decades, driven by the dollar-weakening trade and the broadening artificial intelligence rally, though escalating Middle East tensions and renewed rate hike expectations are tempering sentiment as the month draws to a close.
The MSCI emerging market stock benchmark rose 3.3% in August, marking its largest gain for the month since 2004. Growing investor appetite for diversifying away from dollar-denominated assets continues to channel capital into emerging markets, a force that has also underpinned gold demand.
On Monday, the index edged down 0.1%. Heightened US-Iran tensions, along with Federal Reserve Chair Warsh's remarks at Jackson Hole last Friday, have pushed money markets to price in a more than 60% probability of a September rate hike, weighing on risk assets. September brings a dense calendar of event risks, including jobs data, inflation readings, and the Fed's rate decision, with a hike potentially boosting the dollar and Treasury yields, offsetting the dollar-weakness trade and dampening risk appetite.
Dollar depreciation narrative drives capital flows
At the heart of this emerging market upswing is growing concern over US fiscal health. The so-called "dollar-weakness trade" bets that Washington will allow the currency's purchasing power to erode gradually, easing debt and deficit pressures. Hasnain Malik, head of emerging market equity and geopolitical strategy at Tellimer, said this logic is delivering tangible support to emerging market assets.
"US fiscal and debt worries are driving fresh capital into emerging market local currency assets, including equities," Malik said. "Sentiment toward AI tech leaders is stabilizing, while the dollar-weakness trade is lifting gold prices."
South Korean pension buying and Brazilian election jitters
Amid Monday's broadly soft session, South Korean stocks bucked the trend, helping the emerging market index recover some losses. Samsung Securities noted that the country's pension fund is purchasing tech shares. SK Hynix and Samsung Electronics both closed up over 1.2% on Monday, boosting market confidence.
Brazilian financial assets showed notable volatility on Monday. A fresh poll indicated President Luiz Inácio Lula da Silva's lead in the October election has narrowed from earlier readings, with the real advancing as much as 0.6%, swap rates dipping slightly, and equities moving higher. "Bolsonaro's momentum has picked up," said Alejandro Cuadrado, strategist at BBVA in New York. "The final result will be very close, but the repricing swings could be significant."
EM currencies post second straight monthly gain
In foreign exchange, the emerging market currency index was nearly flat on the last trading day of the month, yet still recorded a second consecutive monthly rise, positioning for its best quarterly performance since June 2025. The Korean won and South African rand were among the standout gainers this month. The Polish zloty led gains on Monday, as higher-than-expected inflation data in Poland reduced market bets on rate cuts there.