(Bloomberg) — Emerging market assets look set to cap a banner year, with investors expecting inflows into equities and bonds to gain momentum in the final quarter.

Sentiment has rarely been this buoyant, with an HSBC Holdings Plc survey showing EM fund managers as the most bullish since the start of 2021 — when an everything rally was in full swing during the pandemic. Goldman Sachs Group Inc. strategists said EM markets are “thriving, not just surviving,” as economic growth this year surpassed expectations despite higher tariffs.

In a likely prelude to what may come, inflows into EM exchange-traded funds began to pick up toward the end of the third quarter. EM assets are facing a positive mix of factors that bode well for the months ahead: the Federal Reserve’s rate-cut cycle is creating space for central banks in developing nations to ease policy, while a softer dollar is encouraging a rotation away from US assets. China’s stock rally could bolster sentiment toward the broader EM universe.

“The outlook for the remainder of the year is positive for equities on improving growth outlook and China stimulus, as well as for local debt as EM central banks continue to cut rates from still-high real and nominal levels,” said Jon Harrison, managing director for EM macro strategy at GlobalData TS Lombard. “There should be solid inflows into EM assets to support currencies.”

READ: Emerging-Market Investor Inflows Are a 2026 Story, BofA Says

Crucial to the optimism are the Fed’s anticipated interest-rate cuts. In Asia, economists expect central banks from South Korea to Thailand to lower rates in the fourth quarter, with the move from Bank of Thailand seen as early as this week. Goldman analysts led by Andrew Tilton wrote in an Oct. 3 note that they expect lower policy rates across the region over the next year for Latin America.

Monetary easing, coinciding with a softer dollar, can provide a powerful backdrop for across-the-board asset gains. Bond inflows can gather pace while equities are supported by improving macro fundamentals. A weaker dollar can help ease the pressure on local currencies caused by lower interest rates.

An iShares ETF tracking EM dollar debt in September saw the biggest inflow since late 2023, while a product tracking the MSCI EM equity gauge saw inflows rebound to $2.2 billion after a slowdown in August. A derivatives index capturing positioning in the Brazilian real, Mexican peso and the South African rand — typical high-yielding currencies in EM — is near its most bullish since early 2024.

“We’re in the very early stages of the demand continuing to come into emerging market debt,” said Shamaila Khan, head of UBS Asset Management’s global EM and Asia Pacific fixed income team. “Of course you can have short periods of volatility and there’s global risk-off, but I do expect the resilience to continue.”

In HSBC’s survey of 100 investors representing a total $423 billion of EM assets, released in September, the share of respondents with a bullish view surged to 62% from 44% in June. Those with a bearish outlook halved to just 7%. A reallocation away from the US and an acceleration in Chinese growth were cited as factors that could deliver positive surprises.

Any upside, however, would vary based on each country’s fundamentals, with market watchers most optimistic about China and less so on some others.

The Colombian peso could underperform from here on fiscal concerns, according to Gautam Kalani, a portfolio manager at BlueBay fixed income for emerging markets, RBC Global Asset Management. He’s also cautious about the Thai baht as its correlation with gold prices weakens and policymakers seek to address currency strength.

Indonesia also faces growing investor skepticism over the central bank’s independence and fiscal discipline. And of course, the predominant risk for EM would be an unexpected resurgence of the dollar that erodes the value of non-US assets.

The MSCI EM currency index has slipped 0.5% in the three months ending September, but is still up 6.8% for the year. If the gains hold, it would be the best annual performance since 2017. MSCI’s EM stocks gauge is at a four-year high thanks to China’s equities rally. EM dollar bonds delivered a sixth straight month of gains in September, its longest winning streak since 2019.

Burgeoning optimism over AI advances in Asia promises further inflows into stocks and currencies across China, where companies like Alibaba Group Holding Ltd. have emerged as standout AI plays, and the tech-heavy markets of South Korea and Taiwan.

“You’re seeing a very strong thematic underpinning in the kind of opportunities we see in China, be it AI, be it the whole innovation that is coming through in biotech,” said Arun Sai, senior multi-asset strategist for Pictet Asset Management. “We have an overweight on China right now. Markets have run up a lot, but we think this still has legs.”

More stories like this are available on bloomberg.com