Emerging-market equities rose to a record high, buoyed by optimism over the artificial intelligence trade and a report that Iran offered a new proposal to reopen the Strait of Hormuz.
The MSCI EM Index rose as much as 1.7 per cent on Monday, surpassing the previous peak in February. Easing West Asia tensions have bolstered sentiment thanks to an extended US-Iran ceasefire, while a developing-market currency gauge rose around 0.3 per cent.
The rally “underscores a market being propelled by structural forces rather than short‑term news flow,” said Gary Tan, a portfolio manager at Allspring Global Investments. “We expect the MSCI EM to grind higher into year end, led by strong earnings momentum from AI beneficiaries alongside sustained investment in energy, infrastructure and defense.”
Emerging-market stocks have staged a stunning recovery after sliding more than 10 per cent following the outbreak of the Iran war.
Gains in Asian shares, which comprise of at least 76 per cent of the index, have powered the rebound as investors rotated back into AI stocks, with benchmarks in South Korea and Taiwan also hitting records on Monday.
Still, the rally has renewed concerns about concentration risk, with much of the gains driven by tech. Some warn that the conflict may not be over completely, and the economic fallout not yet felt, even if markets are increasingly pricing it that way.
“I’m positioned for a continuing rally and benefitted from the jump over the last month, but getting worried by the fast rising expectations especially in tech,” said Xin-Yao Ng, a fund manager at Aberdeen.
The worries come despite strong headline performance. EM stocks are up about 16 per cent this year, three times the gains in the S&P 500 Index.
Forward earnings estimates for the MSCI Emerging Markets Index have been lifted by about 30 per cent this year, driven by the AI-heavy markets of South Korea and Taiwan, compared with 12 per cent for the MSCI World Index.
“In the very near term, momentum is strong and with China usually enjoying strong seasonality in the second quarter,” EM equities can outperform if earnings deliver, said Justin Lin, an investment strategist at Global X ETFs Australia. However, with oil prices remaining high, the “focus will likely shift back to concerns around overall economic growth in the medium-long term.”
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