Emerging-market stocks surge as U.S. growth outlook dims

An MSCI Inc. gauge for emerging-market stocks ended the session 2.1% higher last week, clocking its best day since September. Eastern European currencies and Brazil’s real saw the sharpest gains in a basket of peers tracked by Bloomberg, while the Mexican peso climbed as the President Donald Trump administration confirmed some levies on Canada and Mexico will be delayed.

Speculation that Trump’s trade war will end up hurting the world’s largest economy and enable more interest-rate cuts by the Federal Reserve has been driving the greenback lower, boosting risk assets. The Bloomberg Dollar Spot Index fell to its lowest since November, and investors from Ninety-One to Lazard Assert Management predict emerging-market currencies have room to climb further.

“There have been key shifts in the US dollar narrative that will underpin further EM FX strength,” said Phoenix Kalen, head of emerging markets research at Societe Generale in London. “The dollar appears to be losing some of its safe haven appeal.”

The greater resilience of developing currencies has been driven by worsening expectations for the US economy and rising optimism about Europe’s fiscal shifts, Goldman Sachs strategists wrote in a note.

Polish and Hungarian equities jumped alongside other European stock markets as Germany announced plans to unlock hundreds of billions of euros for defense and infrastructure investments in a dramatic shift from its traditional fiscal stance. Chinese stocks also rose driven by technology names, after Beijing vowed to support the sector and set an ambitious 5% economic growth target.

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So far this year, emerging-market stocks have gained 3.7% — beating the 1.9% advance for the MSCI World Index and a 0.7% drop in the S&P 500 — in a sign of a reversal of their underperformance of recent years.

Goldman lifted its target for emerging-market stocks after incorporating the positive impact of artificial-intelligence adoption over China corporate profits, analysts including Sunil Koul said. Their new forecast suggests room for a 12% gain from Tuesday’s close.

Strong economic growth in the US enabled the Fed to run a tight monetary policy with a strong dollar up to now, said Ulrich Leuchtmann, head of FX research at Commerzbank. Now, the case for US exceptionalism is under fire, he said, and the country will probably no longer serve as the only destination for capital seeking high returns.