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Macroscope | Emerging market rally as much about fleeing the US as finding value
Emerging market equities have seen their longest winning streak since 2004, but it is premature to talk of a renaissance
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Is this the year emerging market stocks finally turned the corner? At the start of 2025, the MSCI Emerging Markets Index, the main gauge of equities in developing economies, was near the same level it was at in September 2010. The benchmark S&P 500 index, by contrast, was up almost 500 per cent.
For the past 15 years, emerging market shares have underperformed their developed market peers. This is one of the most striking disconnects between economic heft – developing countries’ share of global economic output increased from 25 per cent in 2000 to 45 per cent last year – and investment returns.
However, emerging market equities have risen for 10 straight months this year, their longest winning streak since 2004, according to Bloomberg data. The MSCI Emerging Markets Index has gained 30 per cent, its best year since 2009. The MSCI World Index, on the other hand, which tracks stocks in advanced economies, is up about 19 per cent.
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In Bank of America’s latest monthly global fund manager survey, a net 27 per cent of respondents said they had an overweight position on emerging market stocks, the most bullish stance among the world’s main equity markets.
However, it is not just stock markets in developing economies that are performing well. Signs of resilience across the entire emerging market asset class abound. Last week, China issued three- and five-year dollar-denominated debt at essentially the same borrowing costs as the United States, while spreads on a JPMorgan index of US dollar-denominated emerging market sovereign bonds are at their lowest level since 2014.
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Moreover, local currency bonds have returned more than 16 per cent in dollar terms this year, while flows to emerging market bond and equity funds are on track to end the year in positive territory for the first time in four years.
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