Here’s a paradox for you: geopolitical tensions, which are often seen as a source of uncertainty and risk, are expected to be a good thing for emerging market (EM) investments in the coming years. That’s according to Invesco’s annual survey of more than 80 sovereign wealth funds.
Nearly three quarters of the respondents said they expect EM returns to match or beat those from developed markets over the next three years. They said rising tensions between the US and China will help developing nations as international companies – seeking to avoid trade barriers between the world’s two biggest economies – shift their supply chains away from China and toward other EMs. That, in turn, will bring more business, investment, and growth to those places.
But they’re not treating those EMs as a homogeneous bloc: 83% of respondents see emerging Asian countries (excluding China) as their top investment priority in the coming years. And among EM bonds, which more than half of the firms use to invest in developing nations, India’s are a top pick. In fact, 88% of respondents expressed interest in allocating more money to the country’s debt – up from 66% just two years ago. Indonesia is also getting more attention, with 47% looking to increase their exposure, up from 27% in 2022. China, on the other hand, has fallen from favor, with a decline to 35%, from 71%.
Overall, the mood from the latest survey could strengthen the argument for investing in developing countries. After all, EM stocks are cheap and would, along with EM bonds, benefit from the interest rate cuts that are expected this year. On top of that, EM currencies are strengthening, which is a kind of cherry on top for international investors, when they convert their returns back into their home currency. What’s more, EM governments are adopting investor-pleasing economic policies and are seeing their overall output grow faster than their advanced market peers.
There are multiple ways to turn this into an investment opportunity. To gain exposure to EM stocks, excluding China, you could consider the iShares MSCI Emerging Markets ex China ETF (ticker: EMXC; expense ratio: 0.25%). The VanEck JP Morgan EM Local Currency Bond ETF (EMLC; 0.30%) provides an easy way to gain diversified exposure to EM government bonds denominated in local currencies. If you don’t want exposure to EM currencies, then the iShares JP Morgan USD Emerging Markets Bond ETF (EMB; 0.39%) may be a better fit: it invests only in EM bonds that are issued in US dollars. After all, while EM currencies can sometimes boost returns, they’re also volatile and can fall in value, detracting from overall returns.
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