BlackRock Institute: The Federal Reserve is about to cut interest rates, driving a 20% rise in emerging market stocks with three major engines

According to the Zhitong Finance APP, BlackRock's think tank stated that emerging markets have performed remarkably this year. In terms of fixed income, global emerging market bonds have returned nearly 9%, while U.S. Treasury bonds have only returned 4.5%. In the stock market, the MSCI Emerging Markets Index has risen by 20%, far exceeding the 14% increase of the MSCI World Index, which represents developed markets. The weakening dollar, economic resilience, and disruptive trends have collectively driven the performance of emerging markets. Due to the differentiated performance of different countries, selective allocation is necessary. BlackRock's think tank holds a neutral view on overall emerging market stocks while exploring standout sectors and is optimistic about local currency bonds in emerging markets.

The weakening dollar has driven the return growth of emerging market assets this year. Relevant data shows that the dollar has depreciated by about 10% against major currencies this year, while many emerging market currencies have performed strongly. Typically, a weaker dollar is often accompanied by a stronger emerging market, including stocks, as the repayment cost of dollar-denominated debt decreases, thereby supporting corporate profit growth. Additionally, for investors with a dollar-based currency, when they convert the returns of emerging market assets from local currencies back to dollars, their actual returns can be further amplified by exchange rate factors.

BlackRock's think tank stated that another driving factor for the strength of emerging markets is the improvement in the macroeconomic environment. The International Monetary Fund predicts that the economic growth gap between emerging markets and developed markets will narrow compared to the average level from 2010 to 2019 by 2025, but this masks some structural changes occurring in certain countries. BlackRock's think tank believes these changes create favorable conditions for sustained economic growth.

For example, India and Vietnam are achieving good development in the service and manufacturing sectors, respectively, Mexico and Brazil are demonstrating discipline in monetary policy, and Chile's strong financial system adds stability. Additionally, inflation rates in some emerging markets have returned to pre-COVID-19 levels, and a rate-cutting cycle has begun. For instance, Mexico has cut rates five times this year, Indonesia four times, and Poland three times.

BlackRock's think tank mentioned that the Federal Reserve is about to implement rate cuts. Although it believes the extent of the cuts will be limited, this will provide more room for monetary policy easing for emerging market central banks, as following the Fed's policy can reduce the risk of domestic currency depreciation. The institution believes that now is a good opportunity to lock in the yields of local currency bonds in Hungary, the Czech Republic, South Africa, Brazil, Mexico, and Colombia.

The third driving factor is disruptive trends. As has been emphasized, disruptive trends are the new engine driving investment returns, rather than macro factors, and their impact on emerging markets varies. Therefore, BlackRock's think tank stated it will explore standout sectors but holds a neutral view on overall emerging market stocks in the short term.

BlackRock's think tank believes that the restructuring of supply chains has benefited countries like Mexico, Brazil, and Vietnam, while Taiwan and South Korea are deeply involved in the semiconductor field necessary for AI development, and China is also advancing its AI technology. South American countries like Chile and Peru benefit from the demand for key materials under the low-carbon transition trend. From a long-term perspective, with a young population structure and accelerated digitalization process, India is expected to develop into a cutting-edge digital economy One of the reasons for the long-term strategic overweight view on emerging markets is India's development potential