Investors boost returns as falling inflation in emerging markets opens door to faster monetary easing
A sharp slowdown in inflation across emerging markets is fuelling a rally in local-currency bonds, with investors eyeing the prospect of deeper and faster interest rate cuts than in developed economies, according to Bloomberg.
For the first time in decades—outside of the pandemic years—consumer prices in emerging markets have grown more slowly than in developed nations, a shift that has major implications for fixed income portfolios and pension fund strategies.
Morgan Stanley Investment Management and Ninety One Plc are among the asset managers positioning for further gains in emerging-market debt, as central banks in these regions are expected to have more room to ease policy.
“The implication is that monetary policy can be more supportive in emerging markets,” said Jitania Kandhari, deputy chief investment officer at MSIM, as reported by Bloomberg.
Investors in local bonds have already seen average returns of 7 percent this year, outpacing US Treasuries, with some markets such as Hungary, Brazil, and Egypt delivering gains above 20 percent.
This environment is also supporting emerging-market currencies, with the Brazilian real and Hungarian forint notching double-digit gains against the US dollar year-to-date, according to Grant Webster, co-head of emerging-market sovereign and FX at Ninety One.
Webster noted that “the higher yielding markets have room to rally: South Africa and much of Latam where inflation concerns have dissipated yet policy remains elevated.”
Meanwhile, equity markets in Asia have rebounded as optimism over the end of the US government shutdown boosted risk appetite, as per Bloomberg.
The MSCI Emerging Markets Index climbed as much as 1.3 percent on Monday, with South Korea’s Kospi leading regional gains amid reports of a dividend tax cut and increased pension fund allocations to equities.
Chinese hotel and airline shares also advanced on stronger-than-expected consumer prices, driven by holiday demand.
Despite recent volatility—such as last week’s concerns over technology sector valuations—emerging-market assets have shown resilience.
The rapid cooling of inflation in these economies is narrowing the risk gap with developed markets, with Derrick Irwin, senior portfolio manager at Allspring Global Investments, observing that “the emerging world looks relatively less risky than DM for the first time in a long time.”
Looking ahead, central bank decisions in countries such as Uganda, Mauritius, Zambia, and Romania, as well as inflation data from Brazil, Colombia, and Poland, will be closely watched for further signals on monetary easing and its impact on global portfolios.
