[HONG KONG] Emerging markets are likely to receive heavier inflows early next year as more evidence on the resilience of these economies fuels a further shift from US assets, according to Bank of America (BOA).

“People will become much more bullish early next year when they get the confirmation that impact of trade tensions on the economy will be limited,” David Hauner, head of global emerging markets fixed-income strategy, said, referring to developing markets.

“Even small diversification flows from the US can be very meaningful,” he said.

Hauner – who has maintained a bullish view on emerging markets since the first quarter – says the asset class will be supported by a weakening dollar, room for more rate cuts by local central banks and historically low exposure from global funds.

Analysts at Morgan Stanley also say foreign purchases of emerging market assets have been muted so far, and they expect inflows to boost the sector in the final months of the year.

The comments underpin optimism towards emerging markets, with investors betting the asset class will power ahead of its developed-market peers as global funds that have stayed on the sidelines step up investments in developing markets. Emerging markets debt has already handed investors a return of almost 9 per cent this year, as per a Bloomberg gauge, compared with 7.5 per cent gain in developed-market debt over the same period.

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Brazil, Mexico. Colombia, Turkey and Poland will be among the main beneficiaries of foreign inflows, Hauner said. Asian local-currency bonds are likely to attract less money as already low interest rates and a preference for weaker currencies in export-led economies leaves limited room for gains, he said.

Expectations that the Federal Reserve will resume interest rate cuts this month and concerns over US President Donald Trump’s tariff and fiscal policies are weighing on the dollar. Bloomberg’s gauge of the greenback has fallen more than 8 per cent this year, set for its biggest annual drop since 2017. 

Bearish wagers by hedge funds and other speculative investors against the world’s reserve currency stood at about US$5 billion in the week up to Sep 2, according to Commodity Futures Trading Commission data. They have been positioned negatively on the greenback since early April. 

“The dollar was always going higher and the US markets were outperforming so much and so no one was really that interested in emerging markets,” BOA’s Hauner said. “Now there’s going to be room to diversify and we are only at the beginning of this process.” BLOOMBERG