BlackRock Inc.’s research arm is growing even more bullish on emerging markets, where central bankers are moving far faster than the Federal Reserve to reach a peak in their interest rate hiking cycles.

The world’s biggest money manager favors stocks and bonds from the developing world over those from mature economies in the short term, touting China’s economic reopening and the end of the emerging-market rate hike cycle. The odds of a less-aggressive Fed, and therefore a weaker US dollar, are also supportive of developing assets, according to BlackRock Investment Institute strategists including Wei Li.

“EM assets have the edge – for now,” the strategists wrote in a Monday note. “We’ve seen a clear resilience in EM economic activity even as rising rates have slowed DM activity.”

‘More resilient’

While developed economies will need to keep rates higher for longer to tame sticky inflation, emerging markets are more resilient, they wrote. A key index of developing currencies has risen even as the Fed edges closer to the end of its hikes, a sign that domestic policymakers will be able to diverge from the the US and still avoid depreciation, they said. 

Countries including Brazil, India, and South Korea have kept rates on hold during recent meetings. Traders are now looking ahead to the Fed’s next decision in early May, with swap markets pricing in another quarter-point hike as nearly certain.

The firm has been favoring both EM stocks and local-currency bonds. The strategists prefer debt from higher-rated countries such as Mexico, which boast cooling inflation, more balanced external accounts and lower debt-to-GDP levels. 

MSCI Inc.’s gauge of emerging equities is up just 2 per cent this year, underperforming the global benchmark by more than six percentage points. Dollar bonds, meanwhile, are lagging other global fixed-income segments.

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