Emerging Market Assets Poised for Double-Digit Gains as U.S. Dollar Weakens

Bank of America Securities has expressed a bullish outlook on emerging market assets, predicting that they could yield double-digit returns this year due to the anticipated continued decline of the U.S. dollar. The bank's global head of emerging market fixed income strategy, David Hauner, stated that the primary driver for this optimism is the expected weakening of the U.S. dollar and the stabilization of long-term U.S. bonds.

Hauner highlighted that Eastern European currencies and stocks are particularly attractive. In the fixed income sector, Brazil remains the top choice due to its high interest rates and the potential for rate cuts by the end of the year. The U.S. dollar has been at its lowest point in nearly two years, and major banks are forecasting further depreciation due to potential rate cuts by the Federal Reserve, slowing economic growth, and uncertainties in fiscal and trade policies. This could accelerate the flow of capital from U.S. assets to developing countries.

Hauner noted that in a weakening dollar environment, the euro is the best-performing major currency, which typically means that currencies in the European time zone should perform well as they benefit from the euro's appreciation. This year, the rally in emerging markets has been driven by local currency bonds and stocks. Local currency sovereign bonds have provided investors with an average total return of 5.7%, with Brazil leading the way, driven by a carry trade that pushed returns to 20%. Other countries also saw returns of 10% or more.

Emerging market equities have ended a seven-year streak of underperforming U.S. stocks, with the MSCI Emerging Markets Index outperforming the S&P 500 by more than 7%, driven by strong performances in China and India. Despite the positive returns in emerging market assets this year, Hauner noted that investor holdings in these assets remain low. He expects this to change in the coming months as investors gain more confidence in the sustained upward momentum of emerging markets.

Hauner emphasized that investors need to see continued positive surprises from emerging markets in the coming months to build confidence. Historically, investors have suffered significant losses in emerging market assets, but as these markets show sustained growth, investors are likely to become more comfortable with allocating capital to these regions.