Capital flows pivot to emerging markets

Big money is leaning into emerging markets: From equities and currencies to local bonds and credit, the world’s largest asset managers are dialing up exposure to emerging markets (EM), rotating away from the USD and developed-market debt as policy uncertainty clouds the US outlook, according to a Citigroup report picked up by Bloomberg.

The allocation shift is broad and deliberate: Asset managers overseeing more than USD 20 tn have been adding to long positions in equities across Asia, Latin America, and EMEA, while favoring emerging-market currencies over the greenback. In fixed income, EM debt ranks as their top duration call and carries the largest credit overweight. By contrast, US Treasuries, core European sovereigns, and US investment-grade bonds are widely underweight.

Why now? The rotation reflects efforts to reduce exposure to US assets and the greenback in a climate of policy uncertainty and an ever-widening fiscal deficit. Tech jitters tied to artificial intelligence volatility rattled Wall Street this week, with Nvidia’s latest sales forecast failing to stoke confidence in investors. Yet, hardware-heavy Asian markets have largely shrugged off the fears swarming the AI sector in development markets.

MSCI’s main EM equity index has climbed to fresh record highs, with gains of 15% so far this year. EM currencies have advanced for five straight sessions to new peaks. EMs are also offering higher yields: fixed income, local-currency EM sovereigns have returned 2.2% YTD, according to a Bloomberg gauge, while similar USD-denominated sovereign debt lags at 1.7%.

On the policy front, investors have pointed to improved policymaking across several EM economies, particularly on inflation control and debt management. However, even countries showing signs of fiscal strain are finding demand — Indonesia raised USD 4.5 bn last week in its largest global bond issuance in nearly 10 years.

Despite the rally, managers argue that positioning remains far from crowded. EM assets are still relatively cheap compared to developed peers, and global fund allocations to the sector remain light.

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THE CLOSING BELL: TADAWUL-

The TASI fell 1.3% on Thursday on turnover of SAR 6.6 bn The index is up 2.1% YTD.

In the green: Alrajhi Takaful (+10.0%), Jazadco (+9.9%) and GIG (+7.5%).

In the red: SRMG (-9.9%), City Cement (-5.5%) and GACO (-4.3%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.5% on Thursday on turnover of SAR 12.9 mn. The index is down 2.2% YTD.

In the green: Pan Gulf (+9.3%), NAF (+7.9%) and Mayar (+6.2%).

In the red: Alqemam (-17.5%), Alhasoob (-9.8%) and Sahat Almajd (-9.7%).