Bank of America: Emerging markets will see more "capital inflows" in early next year

Recently, Bank of America expects that emerging markets will see a larger influx of capital in early next year, driven by a weaker dollar and further confirmation of the resilience of emerging economies, prompting global investors to accelerate the shift from U.S. assets to emerging markets.

David Hauner, the bank's head of global emerging markets fixed income strategy, stated that even small-scale diversification flows from the U.S. will have a significant impact on emerging markets.

Bank of America analysts believe that investors will become more optimistic in early next year, when more evidence will confirm that the impact of trade tensions on emerging market economies is limited. Morgan Stanley analysts also pointed out that foreign investment in emerging market assets has remained moderate so far, and they expect capital inflows to boost the sector in the last few months of this year.

Emerging market bonds have delivered nearly 9% returns to investors this year, according to Bloomberg indices, outperforming developed market bonds, which rose 7.5% during the same period. The dollar index has fallen more than 8% this year and is on track for its largest annual decline since 2017.

Multiple Positive Factors Supporting Emerging Markets

The Federal Reserve is expected to resume interest rate cuts this month, coupled with concerns over Trump’s tariffs and fiscal policies, which are dragging down the dollar's performance. According to data from the Commodity Futures Trading Commission, as of the week ending September 2, hedge funds and other speculative investors had bearish bets on the dollar amounting to about $5 billion. These investors have held negative positions on the dollar since early April.

Bank of America stated that the dollar had previously been strong, and the U.S. market had significantly outperformed other markets, so no one was really interested in emerging markets. "Now there will be room for diversification, and we are just at the beginning of this process."

Bank of America maintains an optimistic view on emerging markets, a stance it has held since the first quarter. Hauner pointed out that the emerging market asset class will be supported by a weaker dollar, further room for local central banks to cut rates, and historically low allocations by global funds.

These comments reinforce market optimism towards emerging markets, with investors betting that as global funds, which have been on the sidelines, increase their investments in developing markets, the emerging market asset class will outperform similar assets in developed markets.

Brazil, Mexico, and Others Will Be Major Beneficiaries

Bank of America stated that Brazil, Mexico, Colombia, Turkey, and Poland will be the main beneficiaries of foreign capital inflows. It noted that the likelihood of attracting funds to Asian local currency bonds is low, as already low interest rates and export-oriented economies' preference for weaker currencies limit the yield potential.

Analysts expect that those global funds that have previously remained on the sidelines will increase their investments in developing markets, giving emerging markets an advantage in competition with developed markets