Investors are once again focused on emerging market stocks, due to a growing disillusionment towards US assets and the renewed search for growth overseas.
The shift in confidence comes after Moody’s downgraded the US credit outlook, and a spike of Treasury yields has shaken the strength of American Financial Markets.
In a recent client note, Bank of America declared that emerging markets were “the next bull’s market”.
Michael Hartnett, chief investment analyst at BofA Global Research, said: “Weaker US Dollar, US bond yields top, China economic rebound… nothing will work as well as emerging market stocks.”
JPMorgan, which followed suit on Monday, upgraded its rating for emerging market equities, from neutral to overweight. It cited improved US-China relations as well as favorable valuations.
Performance gap between US & EM widens
The MSCI Emerging Markets Index (which tracks stocks in 24 countries) has risen by 8.55% so far this year, outpacing S&P 500, the US benchmark index, which only gained 1%.
The divergence is more pronounced after April 2, when the former President Donald Trump announced a new round of “reciprocal tariffs”.
While the US and global stock markets initially fell after the announcement, emerging markets staged a robust recover.
Between April 9 and 21, the MSCI Emerging Markets Index rose 7% while the S&P 500 fell by more than 5%.
Despite a slight rebound in US assets, sentiment remains fragile.
The 30-year Treasury yield in the US soared past 5% Monday, reaching levels last seen back in November 2023.
The US equity market ended a six-day streak of gains on Tuesday as the Moody’s downgrade reignited concerns in the market.
Why is EM equities poised for outperformance?
The emerging trend could signal a wider rotation in global asset allocation.
Malcolm Dorson, the head of Global X ETFs’ active investment team, believes that emerging market equities have a unique opportunity to outperform.
Dorson told CNBC that EM equities, after underperforming the S&P for the past decade are uniquely positioned to perform over the next cycle.
He cited a convergence of factors, including a weaker US dollar, an underweighted investor position, and strong growth potential at discounted prices.
According to his data US investors typically allocate 3% to 5% to emerging markets in their portfolios, compared with the 10.5% weighting of EMs in the MSCI Global Index.
JPMorgan notes that EM stocks are trading at around 12 times forward earnings–significantly lower than their developed market counterparts.
India, Brazil and Argentina are the focus of attention
India is the fastest-growing economy in the emerging world, largely due to the rising domestic demand.
Dorson also highlighted Argentina’s cheap valuations and Brazil and Greece’s recent sovereign credit upgrades which have improved their investment case.
Mohit Mirpuri is the equity fund manager of SGMC Capital.
After years of US outperformance global investors are starting to look elsewhere for long-term returns and diversification.
Ola El-Shawarby is a portfolio manager for VanEck. She added that in the past, EM rallies have been cut short by temporary catalysts.
She argues that this time, a combination of undervaluation and improved fundamentals combined with structural reforms can provide a longer-lasting momentum.
She said, “Emerging Markets are back in the conversation.”
This post Weak US Outlook revives investor interest In Emerging Markets may be modified as new updates unfold
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