Bank of America: Emerging markets will see more "capital inflows" early next year.

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Recently, Bank of America predicted that emerging markets will see larger capital inflows early next year, as a weaker dollar and further confirmation of emerging economies' resilience will prompt global investors to accelerate their shift from US assets to emerging markets.

David Hauner, Head of Global Emerging Markets Fixed Income Strategy at the bank, stated that even small-scale diversification of funds from the US will have a significant impact on emerging markets.

Bank of America analysts believe investors will become more optimistic early next year, when there will be more evidence showing that the impact of trade tensions on emerging market economies is limited. Morgan Stanley analysts also pointed out that foreign purchases of emerging market assets have remained modest so far, but inflows are expected to boost the sector in the final months of this year.

Emerging market bonds have provided investors with nearly a 9% return this year, according to Bloomberg indices, surpassing the 7.5% gain for developed market bonds over the same period. The US Dollar Index has declined more than 8% this year and is poised for its biggest annual drop since 2017.

Multiple Positive Factors Support Emerging Markets

The Federal Reserve is expected to resume rate cuts this month, while concerns over Trump's tariffs and fiscal policy are weighing on the dollar's performance. According to Commodity Futures Trading Commission data, as of the week ending September 2, hedge funds and other speculative investors had bearish bets on the dollar totaling about $5 billion. These investors have held negative positions on the dollar since early April.

Bank of America noted that the dollar had previously been rising and the US market had significantly outperformed others, so no one was truly interested in emerging markets. "Now there will be room for diversified investment, and we are only at the beginning of this process."

Bank of America maintains an optimistic view on emerging markets, a stance it has held since the first quarter. Hauner pointed out that the asset class will be supported by a weaker dollar, further rate cut space by local central banks, and historically low global fund allocations.

These comments reinforce market optimism about emerging markets, as investors bet that with global funds that have been waiting on the sidelines increasing investment in developing markets, emerging market assets will outperform developed market counterparts.

Brazil, Mexico, and Others to Be Main Beneficiaries

Bank of America stated that Brazil, Mexico, Colombia, Turkey, and Poland will be the main beneficiaries of foreign capital inflows. The bank pointed out that Asian local currency bonds are less likely to attract funds, as already low interest rates and the export-oriented economies' preference for weaker currencies limit the return potential.

Analysts expect that global funds, which had previously stayed on the sidelines, will increase investment in developing markets, giving emerging markets an advantage in the competition with developed markets.

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