(Bloomberg) -- A $1.7 trillion equity rally and the best bond gains in a year in emerging markets got a vote of confidence from investors in US exchange-traded funds who brought in fresh deposits last week, taking 2023 inflows above $10 billion.
Net deposits into ETFs that invest across developing nations as well as those that target specific countries totaled $766.1 million in the week ended Nov. 24, building on gains of $1.57 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $10.1 billion.
Emerging-market assets are heading for the biggest monthly gains since January since easing US inflation boosted wagers the Fed has reached the peak of its monetary-tightening cycle and may even cut rates in 2024. Stocks have rallied for four successive weeks, while sovereign bond yields have shed 84 basis points on average since late October. Carry returns are improving as 19 of 30 widely traded developing-nation currencies head for monthly rallies.
“Despite the prolonged EM underperformance relative to the S&P 500, EM equities may see a significant turnaround in 2024, backed by strong economic fundamentals and a favourable earnings growth trajectory,” said Nenad Dinic, a strategist at Bank Julius Baer & Co in Zurich. “After a dip in 2023, EPS are expected to grow at twice the rate of those in developed markets over the next two years, historically a key driver of relative outperformance.”
On Monday, equity markets were little changed as concerns about China’s economic recovery returned and investors assessed whether the euphoria about Federal Reserve policy and easing inflation is justified.
Read more: China Industrial Profit Growth Eases as Deflation Persists
Still, sentiment is improving for emerging-market stocks after a roller-coaster year sent them to a record low against US stocks. As bets for a dovish Fed in 2024 built up, analysts have upgraded earnings estimates for companies in the MSCI gauge for eight successive weeks, the longest run since February 2022. That’s sent emerging-market stocks to a valuation discount of 39% versus their US peers, approaching the widest level in a year.
BlackRock Inc.‘s exchange-traded fund that buys equities outside China capped seven successive weeks of net deposits, drawing a combined $2.1 billion. That, combined with the equity gains, has boosted the fund’s assets by almost 50% in this period.
Read more: Pitfalls Lie in Wait for Emerging Markets After Bumper Month
Meanwhile, optimism on Turkey is surging over its return to orthodox monetary policy. The country’s banks jumped the most in a month after Bank of America Corp. issued buy recommendations on major private-sector lenders.
The EM currency gauge rose 0.2% on Monday, led by the Thai baht and South African rand, amid broad dollar weakness, while sovereign risk premiums eased.
Investors poured $20 million into bond funds dedicated to emerging markets during the week ending Nov. 21, following a 16-week streak of outflows, BofA said, citing EPFR data.
In the day ahead, investors will watch interest-rate decisions from Israel and Ghana.
Israel may seize on the rapid improvement in markets and consider easing monetary policy as early as this week or the start of next year, a shift that will depend on the central bank’s confidence it’s contained the worst of the economic fallout from the war with Hamas. The shekel was weakening versus the dollar before the decision.
The Bank of Ghana is set to keep borrowing costs unchanged for a second straight meeting amid tame price pressures, as it awaits a debt restructuring deal with bilateral creditors.
Read more: Ghana Set to Hold Rates on Disinflation, Debt Deal