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Moody's recent downgrade of US credit rating reignites the "sell US" narrative, also makes the emerging market stocks back in the spotlight again.
The Bank of America heralded emerging markets as “the next bull market” recently, given weaker US dollar, US bond yield top as well as economic recovery of emerging markets. Similarly, JPMorgan upgraded emerging market equities from neutral to overweight, citing thawing US-China trade tensions and attractive valuations.
The MSCI Emerging Markets Index, which tracks large and mid-cap representation across 24 EM countries, is up 8.55% year-to-date. This compares against a 1% climb by the U.S. benchmark S&P 500 across the same period.
Even though US equities and Treasurys rebounded since Apr 9, rating agencies downgrading US credit rating has reignited investors' concerns. The U.S. 30-year Treasury yield briefly grazed above 5% to hit levels not seen since November 2023, while U.S. equities also snapped a six-day winning streak.
A weakening US dollar which is pressured by fiscal concerns and rising debt has historically been supportive for EM flows. It seems that the new rotation starts from US to emerging markets, and the events that unfolded recently have reinforced the need for more diverse exposure, and India, Brazil as well as Argentina will benefit the rotation given the long-term growth play and cheap valuation.
Emerging markets are trading at 12 times forward earnings, and at a bigger than typical discount compared to developed markets. In terms of positioning, many U.S. investors have just 3% to 5% in emerging markets, compared to the 10.5% in the MSCI Global Index, which captures the performance of large and mid-cap companies across 23 developed markets. After years of U.S. outperformance, global investors are beginning to look elsewhere for diversification and long-term returns, EM are firmly back in the conversation given the combination of deeply discounted valuation, low investor positioning, more durable structural progress acorss key markets as well.Complete digital access to quality Glebors financial topic with expert analysis from industry leaders.
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