Risk-Off Rout Pushes Emerging Markets to First Weekly Loss of the Year, Turkey Still In Focus

A global flight to safety dragged emerging-market assets to their first weekly decline of the year, as geopolitical tensions, uncertainty over the Federal Reserve’s policy outlook and a sharp selloff in technology shares dented investor risk appetite. While short-term volatility has increased, asset managers remain broadly constructive on the medium-term outlook for emerging markets, with Turkey standing out for carry trades and valuation appeal.

Global Risk-Off Wave Hits Emerging-Market Assets

Emerging-market stocks suffered their worst week of the year as a broad risk-off move swept through global markets, knocking a key equity benchmark off record highs. The selloff was driven by rising geopolitical risks, renewed concerns over lofty technology valuations and lingering uncertainty over the future path of U.S. monetary policy.

An index tracking developing-nation equities fell 1.4% over the week, marking its first weekly loss since mid-December. Market volatility increased across asset classes, with sharp swings in commodities and technology shares unsettling investors and prompting a shift toward safer assets.

Friday’s trading brought some relief, with the emerging-market equity index closing down just 0.1% on the day after earlier losses of as much as 1.5%. A late-week pullback in the U.S. dollar also helped stabilize sentiment.

Dollar Retreat Offers Brief Relief to EM Currencies

Most emerging-market currencies ended the week higher as the dollar weakened in the final sessions. Latin American currencies led gains, with the Mexican peso, Brazilian real and Chilean peso each rising more than 1% at intraday highs.

The South African rand advanced as much as 1.9% after two consecutive days of losses, supported by renewed strength in gold prices — a key export for the country.

Emerging-market assets had benefited earlier in the year from a relatively weaker dollar, which encouraged capital inflows and helped suppress volatility. However, analysts warn that this supportive backdrop may be fading.

Citi Warns Dollar Reversal Could Pressure EM Flows

Economists at Citigroup Inc., including Donato Guarino and Luis Costa, said in a note that the tailwinds supporting emerging markets appear to be diminishing.

“A reversal in the dollar — whether driven by greater U.S. rates volatility, a repricing of Federal Reserve expectations, or a broader risk-off move — would likely represent an additional headwind for emerging-market flows,” they wrote.

Investors remain focused on upcoming U.S. economic data and central bank guidance for clues on the timing and pace of future interest-rate moves, with any shift in expectations likely to have outsized effects on risk-sensitive assets.

Technology Rout Weighs on Asian Markets

Technology stocks were a key source of pressure during the week, particularly in Asia. Shares of Taiwan Semiconductor Manufacturing Co. halted a two-day decline on Friday, but broader tech-heavy markets continued to struggle.

South Korea’s equity market, which is highly sensitive to global semiconductor demand, extended its losses, while stocks in Hong Kong and mainland China also fell.

By contrast, equity markets with lower exposure to technology performed better. Indian stocks advanced over the week, while Brazilian equities posted modest gains despite sharp swings in commodity prices.

Indonesia Hit by Moody’s Outlook Cut

Indonesia stood out as one of the weaker performers. The country’s equity benchmark fell and government bond yields jumped after Moody’s Ratings downgraded its outlook, further weighing on sentiment.

The move followed earlier warnings from MSCI Inc. regarding the investibility of Indonesia’s tightly held listed companies. Credit default swaps on Indonesian debt widened by the most in more than four months, reflecting rising investor caution.

Primary Bond Markets Remain Active

Despite heightened volatility, activity in primary bond markets continued. Poland returned to the Samurai bond market, pricing its largest-ever yen-denominated issuance.

A finance ministry official in Warsaw said the government is considering another international debt sale during the first quarter, with the potential for a U.S. dollar-denominated transaction.

Medium-Term Outlook Still Constructive

While emerging markets suffered a setback this week, asset managers remain broadly optimistic about the medium-term outlook, expecting the asset class to outperform developed markets.

Carmignac Gestion SA cautioned investors against selling emerging-market debt prematurely, arguing that fund inflows are likely to continue.

Emerging economies, the firm noted, are growing faster than developed ones, generally carry lower debt burdens, and in many cases are pursuing more disciplined monetary policies. Rising commodity prices are also expected to support demand for emerging-market debt, particularly as many developing nations produce metals critical to the artificial intelligence and green energy transitions.

Aberdeen Investments said a bullish cycle may be emerging for emerging-market equities, driven by what it described as the “three Cs”: capital expenditure, carry and cheap valuations. However, it warned that risks remain around the monetisation of artificial intelligence investments.

Strong 2025 Performance Sets a High Bar

Emerging markets exceeded expectations in 2025, with the MSCI Emerging Markets Index rising 34% in U.S. dollar terms and outperforming developed markets for the first time since 2020. The gains came despite historically low investor allocations to the asset class and heightened geopolitical risks.

This strong performance has raised the bar for 2026, increasing sensitivity to global macro shocks and shifts in risk sentiment.

Turkey Emerges as a Key — but Complex — Play

Recent analysis from late January to early February 2026 highlights Turkey as one of the more compelling, yet increasingly complex, stories within emerging markets.

Turkish equities and bonds have outperformed many peers, supported by a sustained shift toward more orthodox economic policies. However, analysts say momentum is increasingly shifting toward carry-focused strategies rather than outright risk-taking.

ING Think identifies the Turkish lira as a leading beneficiary of FX carry trades, arguing that a slower-than-expected interest-rate cutting cycle would be the “best possible outcome” for maintaining high returns relative to other emerging-market currencies.

On the valuation front, Turkish sovereign debt continues to offer an attractive yield premium over peers such as Brazil and South Africa, particularly in the five- to ten-year maturity segment.

While risks remain — including global volatility and domestic policy challenges — Turkey’s combination of high carry, improving policy credibility and relatively attractive valuations keeps it among top emerging-market recommendations for selective investors.

• Performance: The BIST-100 fell 2.29% this week, ending a record run and marking a sharper correction than the broader MSCI Emerging Markets Index, which was down 0.3% for the week.
• Valuation Context: Despite the recent pullback, BIST-listed companies trade at a significant discount—estimated at 50% to 60% based on P/E and EV/EBITDA multiples—compared to their EM peers.
• Outlook: Analysts view the Turkish equity correction as a response to rising global risk aversion and higher domestic yields, following a period where Turkish stocks hit all-time highs of nearly 14,000 points. 

• Relative Strength: While the Lira saw a marginal 0.26% weekly depreciation against the dollar, it was relatively stable compared to the broader MSCI Emerging Market Currency Index, which also trended toward a weekly loss.
• Carry Opportunity: Turkey remains a top pick for “carry” strategies. The Turkish Lira, alongside the Brazilian Real and Colombian Peso, is cited as offering attractive rates for investors borrowing in low-yielding currencies to capture high payouts.

• Divergence: Turkish 10-year yields rose by 32 basis points (bps) this week, reaching 28.10%. In contrast, average yields across the J.P. Morgan GBI-EM Global Diversified Index declined by 6 bps.

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