Fund managers indicate that emerging market assets will deliver returns significantly exceeding those of developed market assets. Since President Trump initiated the tariff shock in April, both asset classes have been rising in tandem.

Fidelity International, T. Rowe Price, and Ninety One Plc suggest that factors such as further monetary policy easing by the Federal Reserve, reduced U.S. investment by emerging nations, and more prudent fiscal policies could all drive this outstanding performance. They also note that favorable inflation conditions indicate emerging markets will prosper.

Analysts predict that over the next 12 months, the MSCI Emerging Markets equity index will rise approximately 15%, while the comparable developed market index will gain around 10%. According to data from some of the world's largest ETFs, capital flows into emerging market equities are growing faster than those into developed market equities.

George Efstathopoulos, a Singapore-based fund manager at Fidelity, stated: "Emerging market equities are positioned for better performance as they benefit from accommodative monetary policies across most global markets, which promotes domestic lending and consumption growth, while the dollar also weakens. Additionally, it's important to remember that as the most significant central bank, the Federal Reserve will likely restart accommodative policies in the coming quarters."

Since Trump announced his "liberation day" policy on April 2nd, capital flows appear to be tilting toward emerging markets. Subsequently, investors have poured approximately $5.8 billion into the iShares Core MSCI Emerging Markets ETF, the world's largest emerging market ETF, representing about 5.8% of its total fund assets. In comparison, another large fund, the Vanguard FTSE Developed Markets ETF, received $5.6 billion, but this represented only about 3.3% of its total holdings.

Last Friday, emerging assets received further boost when Fed Chair Powell indicated the Federal Reserve would likely cut rates in September. Following his Jackson Hole speech, investors increased their expectations for Fed rate cuts at the September 16-17 meeting.

Since April 2nd, both the MSCI Emerging Markets index and its developed market counterpart have risen approximately 14%, benefiting from optimistic market expectations regarding Trump's tariff threats, viewing them primarily as negotiating tactics. Bond performance has been roughly comparable, with the Bloomberg Emerging Markets bond index rising 4% while the developed markets bond index gained 3%.

Archie Hart, emerging markets equity fund manager at Ninety One Plc in London, stated that the primary reason emerging assets could outperform others lies in their more conventional and market-friendly fiscal policies. He said: "If we observe emerging market policymakers, we find they act cautiously, are constrained by markets, and focus on practical implementation, so we don't see the massive and unsustainable fiscal deficits common in developed markets."

**Overweight Positioning**

According to T. Rowe Price, equity valuations are more attractive in developing markets. Thomas Poullaouec, the Singapore-based fund manager at the company, stated: "In our multi-asset portfolios, we maintain a relatively optimistic stance on emerging market equities because valuations in these markets remain below developed markets, while their earnings growth prospects are also more optimistic."

Poullaouec indicated he still favors holding some developing country currencies, though selectivity is required. He stated: "Much of the upside potential in emerging market currencies has already been reflected in prices, especially considering the current over-concentration of dollar short positions. However, we remain bullish on Latin American currencies, particularly the Brazilian real, supported by factors including higher interest rate differentials and improving fiscal conditions."

Emerging market bonds are also viewed as attractive investment options due to their relatively low inflation rates. This year, emerging markets' Citigroup Inflation Surprise Index averaged -19, a significant decline from the peak of over 40 reached in 2022. The comparable indicator for G10 economies was -12 in July. Negative values indicate inflation levels below expectations.

Fidelity's Efstathopoulos stated: "The favorable factors that drove emerging market local currency bonds higher over the past year remain, such as declining inflation and generally manageable fiscal deficits. In contrast, developed market bonds still need to contend with rising debt levels and massive fiscal deficits."