Market News

Investors are piling into emerging market stocks in search of bargains amid mounting concerns over high valuations in the US, a closely watched survey of fund managers has shown. 

A net 37 per cent of fund managers are overweight EM equities, the highest level since February 2023, according to the monthly poll by Bank of America.

“Investors are very bullish on the outlook for emerging market equities,” said Elyas Galou, investment strategist at BofA. “When we couple rising optimism on the Chinese economy with the bearish view on the US dollar, this is a great combination for emerging markets.”

Expectations for Chinese economic growth rose in August, the survey showed, and recent GDP data suggest that the world’s second-largest economy is shrugging off the impact of US President Donald Trump’s trade war.

A weak dollar also offers a tailwind to EM stocks and bonds by reducing the cost of borrowing for governments and companies, while allowing central banks to cut interest rates and boost economic growth.

The US currency has fallen almost 10 per cent against a basket of peers since the beginning of this year. The BofA survey suggests fund managers expect further declines, with the dollar the largest underweight position of those polled.

EM equities have raced ahead of their developed market peers this year so far, despite initial fears that developing economies would be hit hardest by global trade turmoil. 

An MSCI gauge of EM shares has returned more than 16 per cent in dollar terms this year so far, outstripping an MSCI index of developed market stocks, which has returned just over 11 per cent. Wall Street’s blue-chip S&P 500 has risen 8.6 per cent this year. 

But investors are betting that the rally has further to run, partly because stocks in the developing world remain relatively cheap following a lengthy period of underperformance.

“[EM equities] had a terrible time for years,” said JPMorgan analysts in a recent note, upgrading their recommendation to “overweight” relative to developed world stocks. “Valuations remain very attractive.”

A net 49 per cent of respondents to BofA’s survey said that EM equities were undervalued, the highest proportion for more than a year.

At the same time, concerns are mounting over pricey US stocks following a rapid rebound from April’s sell-off and a string of record highs this summer. A record proportion — a net 91 per cent — of the fund managers surveyed said that US equities were overvalued, while a bet on the “Magnificent Seven” big technology stocks was cited as the “most crowded trade” by fund managers. 

Despite fears about Wall Street valuations, the BofA survey showed that investors increased their allocations to US stocks. Investors surveyed were net 16 per cent underweight US equities, compared with a net 23 per cent underweight in July. 

Willem Sels, global chief investment officer at HSBC Private Bank, said that a strong US earnings season had also helped to reassure investors despite high valuations.

“We’ve had big positive earnings surprises,” he said, which made expensive equities “a little more palatable”.

However, Sels warned that the combination of growing allocations and high valuations could be a risk.

“The upside that we’ve seen in valuations, together with increased positioning, is an easy potential trigger for a little bit of volatility,” he added.

Investors also slashed their allocations to healthcare stocks in August, as Trump slapped a 39 per cent tariff on imports from Switzerland, a major exporter of pharmaceuticals, and threatened tariffs on drugs exported to the US.

The proportion of investors who said they were overweight healthcare stocks in the BofA survey fell to the lowest level since January 2018.