Leaving the US: why do funds prefer emerging markets to developed markets?

Fund managers forecast that the MSCI Emerging Markets index will grow by 15% during the year against 10% for developed countries. Investors' interest in EM assets is boosted by the inflow of funds into the largest ETFs, the soft policy of central banks and expectations of a Fed rate cut.

Returns on emerging market (EM, emerging markets) assets may outperform developed countries in the coming year. The MSCI Emerging Markets index will add about 15% for the year, while the MSCI World index, which includes shares of developed countries - about 10%. This forecast is given by analysts at Fidelity International, T. Rowe Price and Ninety One Plc after both asset groups have been rising almost synchronously since April, when U.S. President Donald Trump announced a new tariff policy, Bloomberg writes.

Meanwhile, real investment flows confirm the interest: since April, the largest iShares Core MSCI EM ETF has received $5.8 billion (5.8% of fund assets), while the Vanguard FTSE Developed Markets ETF has received $5.6 billion (3.3% of assets).

According to experts, EM will be supported by three factors: expected easing of the US Federal Reserve System (FRS) policy, lower interest in US assets and more restrained fiscal policy in emerging economies. In addition, moderate inflation is also helpful.

"EM equities are supported by loose monetary policy in local markets, which is boosting credit and consumption, as well as a weak dollar," notes George Efstathopoulos, a fund manager at Fidelity in Singapore.

According to him, the Fed, the most influential central bank in the world, is also likely to return to lowering rates in the coming quarters(quoted by Bloomberg). Additional positivity came after Fed chief Jerome Powell's speech in Jackson Hole: his statement reinforced expectations that the rate will be cut at the September 16-17 meeting.

One of the factors that allows us to expect outperformance remains tighter and more predictable fiscal policy in developing countries, specifies Archie Hart, manager of the Ninety One fund.

"Governments in these countries act cautiously and pragmatically, and market discipline prevents them from accumulating huge deficits as in developed economies," the analyst explains.

The attractiveness of the estimates remains an equally important factor. T. Rowe Price emphasize that in the company's multi-asset portfolios EM shares occupy an increased weight: they are cheaper than securities of developed countries with higher profit growth potential. Among currencies, experts emphasize the Brazilian real, supported by high rates and improved fiscal expectations.

Emerging market bonds also look interesting due to moderate inflation. Citi's EM inflation surprise index averaged -19 in 2024 versus peaks above 40 in 2022. For the G10 countries, the index was -12 in July, which also reflects a lower rate of price growth than forecast. Efstathopoulos said the factors that supported EM markets last year - lower inflation and subdued fiscal deficits - remain in place, while developed markets face rising debt and widening fiscal imbalances.

Since April, the MSCI Emerging Markets index is up about 14% - the same amount as its developed counterpart MSCI World. Investors tend to view Trump's tariff threats more as an element of negotiations. In the debt market, the results are also comparable: the Bloomberg index for EM bonds added 4%, while developed-country securities gained 3%.

This article was AI-translated and verified by a human editor