The golden age of U.S. stocks coming to an end? Wall Street giants turn to betting on emerging markets: the next bull market is approaching

According to the Zhitong Finance APP, investors in emerging markets on Wall Street, after years of missing out on the surge in the U.S. stock market, are finally seeing opportunities. Companies such as Morgan Stanley Investment Management, AQR Capital Management, Bank of America, and Franklin Templeton are betting that the situation may eventually turn favorable for emerging market stocks.

Michael Hartnett of Bank of America refers to it as "the next bull market." AQR predicts that over the next 5 to 10 years, these stock markets will have an annual return of nearly 6% in local currency terms, surpassing the 4% increase of the U.S. stock market measured in dollars.

Despite a rebound in the S&P 500 index in recent weeks, as of last Friday's close, the index is flat for the year, while the emerging market index has risen by 10%. This surge has ignited hopes that the dismal performance of emerging markets over the past 15 years may come to an end. During these 15 years, the U.S. benchmark stock index soared by over 400%, while emerging market stocks only increased by 7%.

Factors such as President Donald Trump's trade war, the dollar's struggles, volatility in the S&P index, and doubts about the safe-haven status of U.S. Treasury bonds have led investors to increasingly shift their focus away from the U.S. Concerns over the expanding debt and deficit prompted Moody's to downgrade the U.S. credit rating last Friday, adding resistance to the U.S. stock market.

Christy Tan, an investment strategist at Franklin Templeton, stated, "The risk of dollar depreciation has sounded the alarm for investors." She views emerging market bonds as an alternative to U.S. Treasury bonds. "We believe the era of American exceptionalism is temporarily over."

Over the past 14 years, the S&P 500 index's increase has been nearly ten times that of the emerging market index.

Jitania Kandhari, Deputy Chief Investment Officer at Morgan Stanley Investment Management, said, "Now we finally have a catalyst." Two years ago, she shifted from the U.S. to emerging market stocks, declaring that the era of emerging markets had arrived.

She is more confident this time: historically, a weaker dollar can contribute one-third of the returns of emerging market stocks. Data compiled by Bloomberg shows that her fund has underperformed the U.S. stock market over the past two years, but this year her fund's return has reached 17%, surpassing 97% of its peers.

Which sectors are worth paying attention to?

Now, Kandhari is digging deeper, looking for stocks in the banking, electrification, healthcare, and defense sectors, which are significantly influenced by local demand and thus less susceptible to tariff increases. Chris Doheny, Managing Director at AQR, is turning his attention to smaller market-cap emerging market companies expected to perform well in the medium to long term Data compiled by Bloomberg shows that as of the week ending May 9, the total inflow of funds into ETFs listed in the United States that invest in emerging markets and specific countries reached $1.84 billion, more than double that of the previous week.

Indeed, market reversals, political turmoil, and localized crises are inherent characteristics of the emerging market asset class, and this year's upward momentum may still face obstacles. Compared to the United States and other developed markets, corporate earnings growth in some developing countries is uneven, coupled with trading costs, which has left some investors hesitant.

Michael Bailey, head of research at Fulton Breakefield Broenniman, stated, "On one hand, the GDP growth rate of emerging markets is faster than that of developed markets, but the real issue lies in recurring earnings growth."

He added, "Theoretically, India is an attractive emerging market, but due to high trading costs, it may be difficult to enter, and the long-term returns are similar to those of the S&P 500."

Gabriela Santos, chief market strategist for the Americas at JP Morgan Asset Management, noted that so far, the shift of funds from the U.S. to emerging markets has not been reflected in broader capital flow data, while interest in European assets has been evident.

However, she stated that if the dollar continues to weaken, "it could have a positive impact on emerging markets next."

Compared to some larger emerging markets, the U.S. seems to have limited measures to boost its economy as its outstanding debt approaches $30 trillion. Countries like India and the Philippines have rapidly cut interest rates, while the Federal Reserve has taken a cautious stance on overly aggressive easing policies to prevent inflation from reigniting.

Tan from Franklin Templeton remarked, "The fundamentals of major emerging markets are strong, characterized by low external debt and a favorable debt-to-GDP ratio." Tan mentioned Turkey, Saudi Arabia, South Korea, and several Asian countries.

"This low level of debt is significantly attractive, especially compared to the United States."