Emerging market assets are attracting significant capital! Fund managers are bullish: they will outperform developed markets

According to the Zhitong Finance APP, fund managers have stated that the returns on emerging market assets will far exceed those of developed market assets. Since U.S. President Trump initiated tariff shocks in April, both asset classes have been rising in sync. Fidelity International, T. Rowe Price, and Ninety One Plc have indicated that factors such as the Federal Reserve further easing monetary policy, emerging countries reducing investments in the U.S., and adopting more prudent fiscal policies could drive this outstanding performance. They also pointed out that favorable inflation conditions suggest that emerging markets will thrive.

Analysts predict that over the next 12 months, the MSCI Emerging Markets Stock Index will rise by about 15%, while the corresponding index for developed markets will rise by about 10%. According to data from some of the world's largest ETFs, the inflow of funds into emerging market stocks is also growing faster than that into developed market stocks.

George Efstathopoulos, a fund manager at Fidelity based in Singapore, stated, "Emerging market stocks are expected to perform better as they benefit from the loose monetary policies in most global markets, which promote domestic lending and consumption growth, while the dollar also weakens. Additionally, it must be remembered that as the most important central bank, the Federal Reserve is likely to restart easing policies in the coming quarters."

Since Trump announced the "Liberation Day" policy on April 2, the flow of funds seems to be leaning towards emerging markets. Subsequently, investors injected about $5.8 billion into the world's largest emerging market ETF—the iShares Core MSCI Emerging Markets ETF, which accounts for about 5.8% of its total fund assets. In contrast, another large fund—the Vanguard Dow Jones Developed Markets ETF—received $5.6 billion, but only accounted for about 3.3% of its total holdings.

Last Friday, emerging assets received further boosts. At that time, Federal Reserve Chairman Powell indicated that the Fed is likely to cut interest rates in September. Following his speech at the Jackson Hole meeting, investors increased their expectations for a rate cut at the Fed's meeting on September 16-17.

Since April 2, both the MSCI Emerging Markets Index and its developed market counterpart have risen by about 14%, benefiting from optimistic expectations regarding Trump's tariff threats, which are seen primarily as negotiation tactics. The performance of bonds has also been roughly comparable, with the Bloomberg Emerging Markets Bond Index rising by 4% and the developed market bond index rising by 3%.

Archie Hart, an emerging market equity fund manager at Ninety One Plc in London, stated that the main reason emerging assets could outperform other assets is due to their more traditional and market-friendly fiscal policies He said, "If we observe the policymakers in emerging markets, we find that they act cautiously, are constrained by the market, and focus on practical operations, so we have not seen the huge and unsustainable fiscal deficits that are common in developed markets."

Bullish Position

According to T. Rowe Price, stock valuations in emerging markets are more attractive. The company's fund manager based in Singapore, Thomas Poullaouec, stated, "In our multi-asset portfolio, we are relatively optimistic about emerging market stocks, as these markets are still undervalued compared to developed markets, while their earnings growth prospects are also more optimistic."

Poullaouec mentioned that he still tends to hold some currencies from developing countries, but there needs to be trade-offs in selection. He stated, "Most of the upside potential for emerging market currencies has already been reflected in the prices, especially considering the current concentration of short positions in the dollar. However, we remain optimistic about Latin American currencies, particularly the Brazilian real, which is supported by factors such as high interest rate differentials and improvements in fiscal conditions."

Emerging market bonds are also seen as an attractive investment choice due to their relatively low inflation rates. This year, the average value of the Citigroup Inflation Surprise Index for emerging markets was -19, a significant drop from the peak of over 40 reached in 2022. For a similar indicator in G10 economies, it was -12 in July. Negative values indicate that inflation levels are below expectations.

Efstathopoulos from Fidelity stated, "The favorable factors that have driven the rise of emerging market local currency bonds over the past year still exist, such as declining inflation rates and overall manageable fiscal deficits. In contrast, bonds in developed markets still face the issues of rising debt levels and large fiscal deficits."