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In the past week, the emerging markets witnessed a robust $1.7 trillion equity rally, coupled with the most significant bond gains in a year. This positive trend received a vote of confidence from US investors, as fresh deposits into exchange-traded funds (ETFs) surpassed $766.1 million, contributing to total 2023 inflows exceeding $10 billion. The momentum continued from the previous week's gains of $1.57 billion. Year-to-date, inflows have now reached $10.1 billion.
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Emerging-market assets are on track for their most substantial monthly gains since January, propelled by expectations that the Federal Reserve has peaked in its monetary-tightening cycle, potentially leading to rate cuts in 2024. Stocks have rallied for four consecutive weeks, and sovereign bond yields have seen an 84 basis point average drop since late October. As 19 of the 30 widely traded developing-nation currencies head for monthly rallies, carry returns are improving.
Why it matters
Despite a prolonged period of underperformance compared to the S&P 500, emerging-market equities may experience a significant turnaround in 2024. After a dip in 2023, earnings per share (EPS) are anticipated to grow at twice the rate of developed markets over the next two years. While equity markets showed little change on Monday, concerns about China's economic recovery and ongoing assessment of Federal Reserve policy and inflation euphoria were at play. However, sentiment is improving for emerging-market stocks, with analysts upgrading earnings estimates for companies in the MSCI gauge for eight consecutive weeks. This has pushed emerging-market stocks to a valuation discount of 39% compared to their US peers, approaching the widest level in a year.
