Some of this year's hottest emerging market trades—such as long positions on the Brazilian real and AI-related stocks—are raising concerns among asset managers. Multiple institutions have cautioned that these overcrowded trades carry hidden risks. Wells Fargo Securities noted that Latin American currencies, among the top-performing carry trade assets in 2025, have valuations detached from fundamentals. Fidelity International expressed worries about less liquid African markets, which could face risks if global volatility spikes. Meanwhile, Lazard Asset Management remains wary of the sell-off in Asian tech stocks in early November—the worst since April.
"Investors have grown overly complacent about emerging markets," said Brendan McKenna, an emerging markets economist and FX strategist at Wells Fargo in New York. "Virtually all, if not all, FX assets are overvalued and not fully pricing in underlying risks. While they may continue performing well in the short term, a correction seems inevitable."
These concerns are not unfounded. After a strong rally fueled by Fed rate cuts, a weaker dollar, and the AI boom, signs of overheating have emerged in many emerging market segments. The same capital flows that drove gains now pose risks of sudden reversals, potentially impacting global sentiment and tightening cross-asset liquidity.
HSBC's September quarterly survey of 100 investors managing $423 billion in developing-market assets showed 61% were overweight emerging market local-currency bonds—a sharp reversal from a net 15% underweight in June. An EM bond index is heading for its best annual performance in six years. The MSCI Emerging Markets Index posted monthly gains for the first 10 months of 2025, its longest streak in over two decades, with a nearly 30% YTD return—on track for its best year since 2017’s 34% surge.
But 2018 saw a 17% plunge when unexpected Fed hawkishness, the U.S.-China trade war, and a surging dollar triggered sharp corrections in overcrowded EM equities, popular carry trades, and local-currency bonds.
"As year-end approaches, some investors may take profits on 2025’s top performers, potentially increasing FX volatility," said Anthony Kettle, senior portfolio manager at RBC BlueBay Asset Management in London, referring to local-currency bonds.
Asian equity investors recently experienced the risks of high valuations and crowded trades firsthand—AI-themed stocks, previously soaring, suddenly tumbled. Despite global tech sell-offs, analysts warn the sector’s outsized weight in some Asian indices heightens risks. South Korea’s Kospi, 2025’s best-performing major index with a near-70% surge, plunged over 6% in a single session amid volatility before recovering half its losses.
"Korean AI memory chip-related trades are extremely concentrated," said Charu Chanana, chief investment strategist at Saxo Markets in Singapore.
Lazard’s EM equity portfolio manager Rohit Chopra turned cautious post-tech sell-off: "Low-quality firms keep outperforming high-quality ones—historically unsustainable. If positioning stays crowded, reversals are likely." His fund has delivered 23% over three years, beating 95% of peers.
In carry trades, options traders are turning bearish on the Brazilian real—up ~30% this year—as its three-month risk reversals hit a four-year high. "The real exemplifies this year’s crowded winners," said TJM’s Alvaro Vivanco, citing renewed fiscal concerns. Wells Fargo’s McKenna added Chile’s, Mexico’s, and Colombia’s pesos are "also slightly overvalued." Colombia’s trade-weighted rate is at a seven-year high, one standard deviation above its decade average; Mexico’s is 1.4 deviations higher.
Frontier market bonds initially benefited from the broad shift away from U.S. assets, but Fidelity’s Philip Fielding warns: "I worry most about trades where natural buyers can’t absorb concentrated selling." Markets like Egypt, Ivory Coast, or Ghana "may face liquidity crunches if volatility rises." His $538M EM bond fund has outperformed 84% of peers with ~12% three-year returns.
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