The "Dump the US" Rhetoric Resurfaces, Wall Street Predicts: Emerging Markets Will Usher in a New Bull Market!

Following Moody's recent downgrade of the US sovereign credit rating, the narrative of "dumping the US" has resurfaced. Wall Street investment banks are once again turning their attention to emerging markets.

Bank of America recently predicted that emerging markets will usher in a "new bull market".

In a report, a team of Bank of America strategists led by Michael Hartnett pointed out, "With a weaker US dollar, US bond yields peaking, and China's economic recovery... nothing looks better than the prospects for emerging market equities."

Additionally, JPMorgan Chase upgraded its rating for emerging market stocks from "neutral" to "overweight" on Monday, citing the easing of US-China trade tensions and the attractive valuations of emerging market stocks.

Malcolm Dorson, head of emerging markets strategy at Global X ETFs, said in a recent media interview that recent events have strengthened the demand for more diversified geographical exposure. He stated, "After underperforming the S&P index over the past decade, emerging market stocks are in a unique position to outperform the S&P in the next cycle."

"This potential perfect storm stems from a potentially weaker US dollar, extremely low investor positioning, and undervalued excess growth," he said.

According to data provided by Dorson, in terms of allocation, many US investors have only allocated 3% to 5% of their portfolios to emerging markets, while allocating as much as 10.5% to the MSCI World Index (which tracks the performance of large and mid-cap companies across 23 developed markets).

Mohit Mirpuri, equity fund manager at SGMC Capital, said, "We may be at the beginning of a new rotation." He pointed out, "After years of outperformance by US stocks, global investors are starting to look elsewhere for diversification and long-term returns, with emerging markets once again coming into focus."

The "dumping the US" narrative resurfaces

A sharp drop in market confidence in US assets has fueled bullish sentiment towards emerging markets. Last month, amid concerns over global trade tensions, market pessimism towards US assets reached a peak, with US bonds, stocks, and the US dollar all experiencing heavy selling.

Subsequently, as trade tensions eased, pessimism towards US assets abated somewhat. However, Moody's downgrade of US sovereign debt has brought the "sell the US" narrative back to the forefront.

Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions, said that as major investors begin to gradually shift their US Treasury holdings into other safe-haven assets, the US's debt servicing costs will continue to climb, potentially leading to a steeper bearish spiral in US Treasury yields, further downward pressure on the US dollar, and reduced attractiveness of the US stock market.

On Wednesday, the US market once again experienced a "triple whammy" in stocks, bonds, and currency, as the auction of 20-year US Treasury bonds by the US Treasury Department met with a lukewarm response.All three major US stock indices recorded their largest one-day declines in a month, following a six-day winning streak that ended the previous day.

Long-term Treasury bonds were the hardest hit by selling. The yield on 20-year US Treasury bonds surged 13 basis points to 5.12% during the day, while the yield on 30-year US Treasury bonds rose to 5.09%. Meanwhile, the US dollar index experienced a sharp drop of nearly 50 points in a single day.

The MSCI Emerging Markets Index, which tracks large- and mid-cap stocks in 24 emerging market countries, has risen 8.55% year-to-date. In contrast, the S&P 500 Index has only risen 1% over the same period.

Notably, the gap between these two indicators widened even further after April 2, when US President Trump announced the imposition of "reciprocal tariffs" globally.

Although most global stock indices fell in the days following April 2, the trends in emerging market and US stock markets diverged in the subsequent week. From April 9 to 21, the S&P 500 Index fell more than 5%, while the MSCI Emerging Markets Index rose 7%.