As November approaches its final trading week, emerging market (EM) investors find themselves grappling with a persistent series of challenges that have marred the performance of their portfolios. The increases in U.S. market performance, coupled with a strengthening dollar, pose significant obstacles to EM recovery, leaving investors questioning their strategies in an increasingly hostile environment. The current financial landscape is marked by a discernible divergence between U.S. markets and their emerging counterparts, indicating that upcoming weeks could face further pressure.
The robust performance of the U.S. dollar remains a primary concern for EM investors as it continues to climb and recently reached a two-year high, marking an eight-week rally. Analysts from TD Securities have pointed out that in the previous quarter, American funds accounted for over 70% of inflows into developed market bond funds, indicating a strong preference for U.S. assets among global investors. This shift not only reflects the prevailing strength of the U.S. economy but also showcases how the dollar’s ascent is tantalizing investors away from developing markets, intensifying market volatility for countries that heavily depend on dollar financing.
The impacts of this monetary tightening have been felt acutely in Asia, where proactive strategies are required to mitigate the effects of capital outflows. Recent data revealed that EM bond and equity funds experienced outflows for six consecutive weeks — a trend unlikely to reverse in the near term. With market conditions eroding, dedicated investors in EM might now find themselves surrounded by uncertainty.
With heightened geopolitical tensions simmering beneath the surface, investor sentiment towards EM assets is decidedly bleak. The MSCI emerging markets and Asia ex-Japan indexes have exhibited declining trends, experiencing five losses in the past seven weeks. Recent market behavior has suggested a wariness amongst investors, as evidenced by the meager recovery of less than 0.5% after a steep decline of around 4.5% — the most significant retreat since mid-2022. This illustrates a lack of confidence and an inclination to hold back on re-entering volatile markets, underscoring the prevailing caution amid macroeconomic uncertainties.
Societe Generale (SocGen) analysts have further exacerbated these sentiments by reducing EM exposure in their forecasts for the upcoming year. Their adjustments stem from a confluence of factors — including the implications of U.S. economic policies, varying growth rates, and the diverging trajectories of interest rates. As a consequence, the outlook for EM remains troubled, disallowing any potential for a significant rebound in the immediate future.
The upcoming week’s trading activity is anticipated to be slower than usual, primarily due to the Thanksgiving holiday observed in the United States. Consequently, we can expect reduced market liquidity which may deter any decisive movements. Furthermore, the economic calendar appears light in terms of impactful indicators and events; however, there are still pivotal reports to note. These include critical rate decisions from central banks in New Zealand and South Korea, GDP figures from India and Taiwan, and purchasing manager index (PMI) data from China.
The first trading day will feature several key announcements, including retail sales and trade data from New Zealand, along with inflation figures and industrial production from Singapore and Taiwan, respectively. These economic indicators could offer valuable insights into market trends but may not be sufficient to shift prevailing investor sentiments drastically.
As the landscape for emerging market investors continues to evolve, the focus will likely remain on managing risk and reassessing strategies amid ongoing U.S. economic strength and fluctuating global dynamics. The unique push and pull of geopolitical tensions, currency movements, and investor behavior all combine to ensure that navigating through these uncertain waters will require vigilance and adaptability. For now, patience may be a virtue, as investors bide their time awaiting a clearer signal that might indicate a favorable environment for re-engagement with emerging markets in the new year.