Fund managers are pouring money into emerging markets. Here’s where investors see opportunities

Amidst global equity market volatility and looming U.S. tariffs, institutional investors are increasing allocations to emerging markets, reaching levels not seen since August 2023, according to Bank of America's Fund Manager Survey. The survey of 222 fund managers overseeing $587 billion in assets indicates a net 28% overweight position in emerging market stocks, driven by expectations that the final U.S. tariff rates will be lower than initially feared. Investment banks like Goldman Sachs are also launching new emerging market-focused products, while analysts are highlighting specific opportunities in countries like Uzbekistan, India, Brazil, and China, citing favorable demographics, cheaper valuations, and increasingly transparent policymaking.

Analysis

Institutional investors are exhibiting a significant pivot towards emerging markets (EMs) amidst global equity volatility and anticipated U.S. tariff adjustments, as evidenced by Bank of America's June Fund Manager Survey. This survey, polling 222 managers overseeing $587 billion, revealed a net 28% overweight position in EM equities—the highest since August 2023—up from 11% the prior month. This shift is underpinned by expectations that final U.S. tariff rates on all imports from trading partners will be considerably lower than initially proposed for specific nations like Sri Lanka (44%), Cambodia (49%), and Vietnam (46%), with 77% of surveyed investors anticipating a duty rate below 82% and a weighted average forecast of 13%. Furthermore, a perceived "EM-ification" of developed markets (DMs), characterized by their own policy volatility, contrasts with more pragmatic EM monetary and fiscal policies, including earlier rate hikes to combat inflation and generally smaller fiscal deficits. EMs are increasingly viewed favorably due to lower valuations, being "uncrowded and underowned," and displaying increasingly transparent policymaking, while DMs, particularly the U.S., are seen as crowded trades with valuations near historical highs. Investment banks are responding to this trend, exemplified by Goldman Sachs launching an Emerging Markets Green and Social Bond Active ETF. Specific country opportunities are gaining prominence, notably Uzbekistan, which benefits from high gold prices, energy tariff reforms, and potential credit rating upgrades from S&P and Moody's, leading to an overweight recommendation on its external debt from Bank of America and favorable views from JPMorgan for its 5.3% average annual GDP growth since 2017. Other analysts highlight India, Brazil, and China for their significant upside potential, citing favorable demographics and valuation discounts relative to U.S. markets, complemented by Deutsche Bank's "Global South" thesis, which points to demographic tailwinds (projected 70% of global workforce by 2040) and growing economic influence (20% of world's nominal GDP) for a bloc of over 130 countries.

Key Decisions for Investors

• Investors should consider re-evaluating their exposure to emerging markets, potentially increasing allocations given the renewed institutional interest, attractive relative valuations, and the expectation of moderated U.S. tariff impacts.
• It is crucial to closely monitor the final U.S. tariff implementations due July 8, as current market optimism for emerging markets is partly predicated on these rates being substantially lower than initially announced, which could significantly alter EM attractiveness.
• Focus due diligence on specific emerging markets with robust fundamentals and identifiable growth catalysts, such as Uzbekistan, or those highlighted for value and demographic advantages like India, Brazil, and China, while remaining prepared for the inherent volatility characteristic of these markets.