BlackRock: Emerging markets to thrive as U.S. dollar weakens

Investment management bank BlackRock has claimed that emerging markets will grow as the U.S. dollar weakens.

Over the past few months, U.S. equities have continued to trade sideways. Last Tuesday, for example, three major indexes on Wall Street concluded the trading session lower. Emerging markets, meanwhile, gained 20 percent during the same period.

"We believe the long fall in emerging market stocks and the recent rally show that a lot of the economic damage is now in the price," a recently published BlackRock note said.

FactSet data revealed that the iShares MSCI Emerging Markets ETF showed an annual growth of 8.4 percent. The iShares MSCI EAFE ETF — which gauges stocks in the developed markets — rose at a lower annual rate of 7.8 percent.

Since mid-2021, these markets have lagged behind developed markets — down nearly 20 percent — because central banks in emerging markets tightened their monetary policies early.

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According to BlackRock, emerging markets managed to endure rapid bulls in developed markets at that time. With plenty of natural resources, they could limit the fallout from early monetary tightening with the rising commodity prices.

On the other hand, BlackRock strategists believe that "the damage from higher rates has yet to fully materialize" in developed markets. Thus, they suggested that investors stick with certain stocks and bonds.

"At its peak, the US dollar rose more than 19% in 2022 before falling in the fourth quarter."

Wade Balliet, Chief Investment Officer at Bank of the West

After the Federal Reserve began consecutively raising interest rates, the U.S. dollar soared to a level that had not been seen in decades. At its peak, the greenback managed to gain more than 19 percent before falling in the last quarter of 2022.

As inflation in the U.S. has shown signs of slowing down, analysts expect a policy pivot from the Fed soon, which can lead to a further decline in the greenback. This situation allows emerging economies to repay debts — which are usually in the U.S. dollar — easier.

Investors lower stake in U.S. stock market

Recent data also showed that global asset managers had started to reduce their stake in U.S. stocks.

A survey conducted by the Bank of America revealed that 39 percent of global asset managers held an "underweight" stance in the U.S. stock market this month. Previously in December, only 12 percent of these asset managers lowered their stake in U.S. stocks.

Meanwhile, more than a quarter of global asset managers said they were overweight in emerging markets. They also shifted their budgets to the Europe equity market. Many reported four percent overweight in Europe stocks from 10 percent underweight in the previous month.

More than half of 253 asset managers surveyed projected that the S&P 500 index would trade below the 4,000-point line by the end of 2023, while 37 percent of them were confident that the index would end this year above that mark. The S&P traded at around 4,010 on Tuesday.

Morgan Stanley equity strategist Michael Wilson said company earnings and profit margins would likely disappoint regardless of an economic recession. Wilson explained that the "inflationary environment" the U.S. endured negatively affected company profitability.

Citi global strategist Jamie Fahy said the U.S. equity market would suffer further if tech stocks posted more disappointing earnings. Due to massive stimulus by the Fed and the U.S. government, tech titans like Apple and Tesla thrived in the market lows in 2020. However, their stock prices recently fell sharply.

Most investors said inflation had peaked, leading to greater confidence that the U.S. would avoid a recession. Fewer survey participants projected that the federal funds rate would hit 5.25 percent this year.