The British newspaper Financial Times, said that the investment asset class, which includes real estate and liquid financial assets, is currently at a critical moment as the macroeconomic climate has largely shifted in its favor.
It stated further that the interest rates in the United States have finally begun to fall, which should lead to lower yields on US government bonds and enhance the appeal of debt that offers higher interest rates than what is available outside the usual club of rich countries.
The newspaper added that the crucial thing here is that this long-awaited decline in US interest rates has already begun, supporting investors to move towards riskier asset classes such as emerging market debt and equities, which have returned to the list of interests of many investors who have ignored the asset class for years.
Moreover, the British newspaper’s report indicated that Beijing has launched a wide-ranging package of stimulus measures. This has pushed up Chinese stocks, which were previously unpopular with investors, and may have helped support demand for the resources that many emerging market countries can provide.
For several investors, the asset class wasn’t worth the hassle, the Financial Times reported. Simply tracking the S&P 500 US stock index over the five years was enough to double your investment.
Over the same period, the MSCI Emerging Markets Index rose only about 10%, so the US markets attracted money from around the world, in bonds and stocks, leaving emerging markets in the lurch.
M&G Investments said in a recent blog post that the lower US interest rates would free up emerging market debt. Charles de Quinsonas, fund manager at the firm’s London office, said investment flows to emerging markets had been “particularly terrible” since the outbreak of the Corona virus pandemic.
“This is now in the hands of emerging markets,” de Quinsonas added, noting that it only takes small inflows to support the asset class.
EPFR, which tracks the performance of investment funds, said that nearly $40 billion of investments flowed into Chinese equity funds in the first week of October.
The influx of new money, which more than doubled the previous weekly record, also pushed the headline figure for all emerging-market equity funds tracked by EPFR to a new record high, the firm added, noting that emerging-market debt funds were extending their longest streak of inflows in more than a year.
But this rapid surge alone won’t be enough to boost interest in emerging markets over the long term, and that’s not the only source of caution. Benjamin Millman, chief investment officer at Edmond de Rothschild Asset Management, said he was leaning toward over-allocating emerging markets for a while.
The pro-growth shift in China and the monetary shift in the United States are helping him in this regard. He said he was sticking with that position, but the possibility that the United States had cut interest rates too sharply and too soon was troubling him.
“The Fed’s outlook is less clear than it was just two weeks ago,” Swiss bank UBS said, referring to inflation expectations creeping back into U.S. markets.
The bank said in a note this week that if the U.S. economy is not resilient, it is plausible that the Fed will raise interest rates back to where they started and possibly higher by early 2026 — a reversal that would have a “net negative impact on emerging market assets.”
Meanwhile, credit rating agency Standard & Poor’s Global also warned this week that higher debt burdens and higher borrowing costs for emerging market governments mean they will “default on their foreign currency debt more frequently over the next decade than they have in the past.”
