{"text":[[{"start":5.8,"text":"The writer is managing director and head of foreign exchange research for Central and eastern Europe, Middle East and Africa and Latin America for Deutsche Bank"}],[{"start":15.989999999999998,"text":"Many emerging market investors started 2025 with a degree of trepidation. Middle income and developing economies had already been profoundly affected by the twin supply shocks of the Covid-19 pandemic and Russia’s invasion of Ukraine."}],[{"start":35.58,"text":"Now, the incoming Trump administration was promising a shake-up of the international trading system that could disproportionately hurt emerging markets that had benefited from the preceding three decades of growing global trade."}],[{"start":50.57,"text":"That came after a long period where emerging market equities had trailed those in developed economies. Over 2010-24, the benchmark Emerging Market MSCI index had risen only 8.7 per cent, underperforming the MSCI World index by more than 200 percentage points."}],[{"start":69.25,"text":"Fast forward nine months and emerging market returns have been spectacular. Emerging market currencies have enjoyed the strongest first three quarters of the year since 2010 as measured by a Deutsche Bank composite index. An equally weighted basket of such currencies is 12.7 per cent up against the dollar in the year to date."}],[{"start":91.25,"text":"Equities have also enjoyed a near record performance since 2010 with the benchmark MSCI Emerging Market equities index rising 23.9 per cent. Local debt is also showing gains, with a Bloomberg index of currency-hedged debt up 6.3 per cent. And for dollar-denominated, high-yield debt, the returns are 9.3 per cent, according to a Bloomberg index."}],[{"start":120.25,"text":"The reasons for all this are various, but there should be cautious optimism the trend can continue."}],[{"start":126.39,"text":"First, there has been the weakness in the dollar. The dollar plays a crucial role in emerging market trade as the main invoicing currency for imports, and financial systems, with a large share of debt still denominated in it. As such, a weaker dollar helps simultaneously to improve the current account balance of developing economies and reduce their external liabilities."}],[{"start":null,"text":"
"}],[{"start":149.69,"text":"Moreover, as the Bank for International Settlements has noted in a recent report, the financing of emerging markets has been shifting towards portfolio flows and away from bank related funding. Portfolio flows tend to be more sensitive to large swings in risk appetite driven by the dollar."}],[{"start":167.69,"text":"Second, emerging market assets represent an appealing alternative to those wishing to diversify away from US exposure, or worried about fiscal vulnerabilities in developed markets. As well as generally healthier debt positions, the asset side of many emerging market balance sheets is geared towards real commodities such as precious and industrial metals and agricultural products, a hedge against inflation risk. Asian economies have meanwhile largely avoided the high levels of inflation that have plagued the rest of the world in recent years."}],[{"start":204.03,"text":"Finally, prudent policy has helped. According to data from the IMF fiscal monitor, a large majority of emerging market economies have been tightening fiscal policy since 2024, as measured as the change in the cyclically adjusted primary budget balance."}],[{"start":221.61,"text":"By and large, central banks have also been cautious. Interest rates started to rise in emerging markets before the Fed in late 2021 and early 2022, and at a faster pace. This has allowed emerging market central banks to be more generous with interest rate cuts on the way back down. In turn, this has driven a striking divergence between fixed income returns in emerging and developed markets in the last 12 months."}],[{"start":251.76000000000002,"text":"The missing ingredient so far has been growth. A key part of the proposition for investments in emerging markets is the catch-up potential of incomes to wealthier economies."}],[{"start":263.04,"text":"While some EMs have done well — Turkey and Poland are examples — many more have seen lacklustre growth performance since the Great Financial Crisis of 2008-2009. One important question will be the success of “anti-involution” reforms in China to fight deflation, which appear to be gathering pace. Another will be whether the productivity benefits of AI can diffuse away from technology leaders like the US."}],[{"start":293.97,"text":"While these questions remain to be answered, a world in which US exceptionalism is challenged is a positive one for allocations into emerging markets. Greater access to foreign capital could in turn provide emerging markets with funds for much needed investment, something that economies as diverse as Saudi Arabia, Poland and the Philippines are banking on. A virtuous cycle could follow, and a return to optimism on the asset class."}],[{"start":331.12000000000006,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1759981980_8859.mp3"}