NEW YORK: Emerging market (EM) assets look set to cap a banner year, with investors expecting inflows into equities and bonds to gain momentum in the final quarter or 4Q.
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 Covid-19 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 3Q.
EM assets are facing a positive mix of factors that bode well for the months ahead: the Federal Reserve’s (Fed) 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.”
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 4Q, with the move from the 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, with solid inflows continuing in the first week of October, according to data compiled by Bloomberg.
A product tracking the MSCI EM equity gauge saw inflows rebound to US$2.2bil last month 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 EM 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 US$423bil 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 United States 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, said Gautam Kalani.
Kalani is a portfolio manager at BlueBay fixed income for emerging markets, RBC Global Asset Management. — Bloomberg
