Emerging-market assets look poised to deliver “several percent” returns this year on expectations of a continued decline in the US dollar, according to BofA Securities.
“For the year, we can easily maintain the double-digit return and that’s because we see the dollar as the most important driver and see a stabilization of the US long-end,” said David Hauner, head of global emerging markets fixed-income strategy at the US brokerage.
BofA Securities is bullish on the Eastern European currencies and equities. In fixed income, Brazil remains its top pick as interest rates are very high in the South American nation and rate cuts could begin by the end of the year, Hauner said.
The US dollar is trading near two-year lows. Wall Street banks, including Morgan Stanley and JPMorgan Chase & Co., expect further weakness in the US currency due to likely interest-rate cuts, slowing economic growth, and ongoing fiscal and trade policy uncertainty. This may accelerate the rotation of funds from US assets into developing nations.
“In a context where the dollar weakens, the currency that improves most among the big currencies is the euro,” Hauner said. “That normally means that the whole European time zone should be doing best because these currencies benefit most when the euro goes up.”
This year’s emerging-market rally has been underpinned by local-currency bonds and stocks. Local sovereign debt has handed investors an average total return of 5.7%, led by Brazil where a carry rush has fueled a 20% gain. Ten other countries have yielded returns of 10% or more.
Stocks, on their part, have ended seven years of underperformance relative to the US market. The MSCI EM index is beating the S&P 500 by more than 7%, led by China and India.
Despite positive returns from emerging-market assets this year, Hauner said investor positioning in the asset class remains light — something that could change in the coming months.
“People will need to see a few months where emerging markets keep surprising on the upside, right?” said Hauner. “People have been burned badly in emerging market assets in the past and you know, they just need to get more comfortable over time.”
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