Emerging Markets Attract Investors Amid Fed Rate Cut Anticipation, 65% Price Discount

As the anticipation of a Federal Reserve interest rate cut grows, emerging markets are becoming increasingly attractive to investors. This is due to factors such as lower local inflation and relatively lower public debt, which enhance their investment value. The portfolio manager at Eastspring Investments in Singapore highlighted that emerging market stock prices are 65% lower than those in the U.S. market, presenting numerous investment opportunities across various markets and industries. The manager is actively seeking investment opportunities in the Philippines, Indonesia, South Korea, and Latin America.

The manager emphasized that the real interest rates in emerging markets remain high, currently at levels comparable to the highest since the financial crisis. As the U.S. enters a rate-cutting cycle, this situation is expected to be highly beneficial for emerging markets. The market widely expects the Federal Reserve to cut rates next week, following data showing a significant slowdown in U.S. job growth in August and an increase in the unemployment rate to its highest level since 2021.

The manager noted that the political landscape in developed countries is becoming increasingly unstable due to rising public debt, from Japan to the U.S. and France. As a long-term investor, the manager can overlook recent turmoil in Indonesia, where the country has experienced its most severe unrest in years and the finance minister has suddenly resigned. The manager stated that they will not react to short-term market events until they fully understand their long-term impact, and thus, their views and investment allocations remain unchanged.

At an investment forum held in Chile last year, participants in a survey on emerging markets cited "political risk" as the dominant concern, reflecting widespread anxiety ahead of dense election cycles in numerous countries, including Indonesia, South Africa, Mexico, and India. However, the situation has since shifted. In developed countries, politics is increasingly becoming a new source of risk due to accumulating debt leading to budget constraints, and the pressure exerted by the U.S. President on the Federal Reserve has further exacerbated political uncertainty.

Emerging market bonds appear to offer more risk-averse value compared to developed market bonds. This is reflected in asset price performance, where the yield on 30-year government bonds in developed economies has risen by an average of 16 basis points over the past month, indicating heightened investor concern. In contrast, the yield on long-term bonds in developing countries has risen by approximately 4 basis points. The stock market also shows a similar trend, with emerging market stocks outperforming U.S. stocks for the first time since 2017.

The International Monetary Fund predicts that the total debt of developing countries as a proportion of annual economic output will be around 75% this year, compared to approximately 125% for the G7 developed countries. Indonesia's ratio is around 40%, and Vietnam's is 33%, both significantly lower than the concerning levels in some developed countries. This fiscally prudent stance is reinforced by low inflation and ample foreign exchange reserves, which provide emerging market central banks with the flexibility to manage market volatility.

The manager concluded that the perception that emerging markets are generally riskier may not be accurate. Investors are gradually recognizing the value and opportunities presented by these markets, especially as the global economic landscape evolves.