A rally in emerging-market assets has picked up steam in recent weeks, boosted by rebounding oil prices and expectations for a cautious Federal Reserve. The MSCI Emerging Markets Index, which measures stock performance, is up more than 4% this year, powered by gains in Russia, Mexico and other developing countries. A separate MSCI index that tracks foreign exchange stands near its highest level since the summer, thanks to rallies in the Brazilian real and other emerging-market currencies. Investors often look to emerging markets—where many hope to garner bigger gains by assuming comparatively greater risk—as a gauge of market sentiment. The big drop in U.S. stocks last year was preceded by steep declines in the assets of countries like Argentina and Turkey, as worries over Fed tightening and global growth dried up risk appetite. Cheap valuations in the wake of last year’s selloff have been a key draw for emerging-market investors in recent weeks. Investors sank a net $26.6 billion into emerging-market equity funds in last year’s fourth quarter, even as they pulled $98.2 billion from funds focused on developed-market stocks, according to fund tracker EPFR Global. The inflows have continued into 2019, with investors pouring some $2.1 billion into emerging-market stock funds in the week to January 9. Those bets are paying off so far. Oil has clawed back some of last year’s steep decline, buoyed by easing oversupply fears. That's been a boon for exporters including Russia and Brazil. Other commodities, like nickel and palladium, have also climbed. Signals from Fed officials including Chairman Jerome Powell that the central bank may be patient with interest-rate increases have also lifted emerging-market assets. The recent comments have mitigated fears that tighter monetary policy would stifle growth while higher yields on U.S. government bonds would dim the allure of emerging-market assets. “I trust this rally,” said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer Asset Management. He owns the Argentine peso and the country’s local currency bonds, which he believes will benefit from fiscal improvements Argentina made since signing a bailout package from the International Monetary Fund last year. He also owns the Indian rupee, betting that last year’s drop in oil prices will help the economy of India, an importer of crude. Are you bullish on emerging markets? Let the author know your thoughts at ira.iosebashvili@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |