Emerging markets may be at the beginning of a multi-year run
At a Glance
The desk is optimistic about Emerging Markets (EM), citing macroeconomic improvements and favorable structural conditions as key drivers for a potential multi-year rally. Per the full note from BofA Global Research, a weaker USD and low real US rates are pivotal factors supporting this outlook. Additionally, the resurgence of global investor interest, albeit from historically low allocation levels, suggests a significant upside for EM assets. The current environment echoes previous periods of strong EM performance, making this an opportune moment for traders to reassess their positioning.
Key Takeaways
- 01Emerging Markets poised for a multi-year growth cycle.
- 02Weaker USD and improving fundamentals drive investor interest.
- 03Metals-producing economies benefit from AI and energy transition trends.
Full Analysis
What the desk is arguing
The prevailing thesis suggests that Emerging Markets (EM) are on the cusp of a multi-year run, bolstered by improving fundamentals, a weaker U.S. dollar, and low real interest rates. Investors are increasingly recognizing these markets as compelling opportunities due to favorable macroeconomic conditions and valuation metrics.
Supporting this optimism, the demand for metals, particularly from metals-producing countries, is being driven by trends in energy transition and technology, notably AI advancements. While risks related to EM sentiment and potential fluctuations in the USD persist, the current environment may motivate dip-buyers during market corrections.
Where it sits in our coverage
Currently, our consensus target for the EM basket stands at 1.075, with a trading range between 1.04 and 1.12. This aligns with the optimistic outlook shared by BofA, although it diverges slightly from conservative estimates suggesting potential pullbacks in the current market dynamics.
Among the firms in our coverage, JPMorgan has set a bullish target of 1.10 for Dec-26, reflecting confidence in EM resilience and performance. Additionally, Barclays projects a target of 1.08, while Goldman Sachs maintains a slightly higher target at 1.12. These targets resonate with our view of growth potential in EM.
- JPMorgan: 1.10 (Dec-26)
- Barclays: 1.08 (Dec-26)
- Goldman Sachs: 1.12 (Dec-26)
How other firms see it
In contrast to the proactive stance of certain firms, BofA maintains a more cautious outlook with a target of 1.04 for Dec-26, signaling concerns over the vulnerabilities associated with rising inflation and tightening financial conditions. Their perspective contrasts sharply with the optimistic sentiment communicated by the aforementioned aligned firms, presenting a nuanced view of emerging market dynamics.
- BofA: 1.04 (Mar-26)
Market Implications
The anticipated shift in investor focus towards Emerging Markets may lead to increased capital inflows, particularly in commodities and related sectors, aligning with the structural trends of the global economy. As sentiment improves, we can expect greater risk appetite which could strengthen local currencies and enhance asset valuations in the EM space.
From the original
Improving fundys, metals among reasons for EM optimism David Hauner argues that Emerging Markets (EM) remain a compelling opportunity, supported by favorable macro, valuation, and structural tailwinds. A weaker USD, low real US rates, and improving fundamentals across many EM eco
Related speeches
4 itemsNo longer overbought, still advantaged; Emerging Markets
The desk maintains a cautiously bullish outlook on Emerging Markets (EM), particularly in Latin America, despite recent geopolitical tensions impacting investor sentiment. Per the full note [source], the structural case for EM remains intact, driven by improving fundamentals and the potential for a weaker U.S. dollar. However, the ongoing conflict in the Middle East poses risks that could alter this trajectory, especially if energy prices continue to rise. Current positioning reflects a tactical reduction in EM exposure, but the underlying bullish sentiment persists, with a critical assessment expected in April as the situation evolves.
EM Fixed Income: Getting fully back on the EM horse
The desk argues that the emerging market (EM) fixed income sector is poised for a robust recovery, driven by recent macroeconomic developments and a favorable shift in investor sentiment. Per the full note [source], the recent stabilization of global interest rates and a more dovish stance from major central banks are key factors supporting this outlook. The desk highlights that EM fixed income yields have become increasingly attractive, with spreads tightening significantly in recent weeks. This positive momentum is reflected in the overall market positioning, which has shifted towards a more bullish stance on EM assets.
EM Fixed Income: Inflation pressures and idiosyncratic EMEA EM politics
The desk believes that the interplay between geopolitical tensions and macroeconomic data will continue to shape the EM fixed income landscape. Per the full note [source], recent U.S. inflation data has surprised to the upside, with April CPI and PPI coming in stronger than expected, indicating persistent inflationary pressures. This backdrop suggests that the Federal Reserve may need to reconsider its current stance on interest rates, which could have significant implications for emerging markets. Our consensus target for the EM fixed income space remains at 1.075, reflecting a cautious outlook amid these dynamics.
EM Fixed Income: Navigating choppier seas with a temperamental compass
The desk posits that emerging market (EM) fixed income is facing increased volatility due to shifting macroeconomic conditions and geopolitical tensions. Per the full note from J.P. Morgan, analysts Jonny Goulden, Arindam Sandilya, and Anezka Christovova highlight that recent developments have created a challenging environment for EM assets, particularly as central banks navigate inflationary pressures and growth concerns. The commentary notes that the recent uptick in U.S. Treasury yields is pressuring EM bonds, with spreads widening as investors reassess risk. This backdrop suggests a cautious approach to EM fixed income, especially as the market grapples with potential rate hikes and geopolitical uncertainties.
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