The Daily Prophet: Come Join the Cool Kids in Emerging Markets

By all accounts, investors should be fleeing emerging-market assets. The Federal Reserve is due to start shrinking its $4.7 trillion balance sheet this month. In Spain, Catalonia’s separatists said nothing would stop their drive toward an independent state, raising fresh existential questions about the euro. In Japan, polls show falling support for Prime Minister Shinzo Abe just weeks before a general election he called.

Such a mix of risks would usually send investors fleeing volatile assets such as those found in emerging markets. Instead, the MSCI Emerging Markets Index has risen for four straight days, almost reversing a brief selloff at the end of September and bringing its gains for the year to almost 28 percent, compared with 16 percent for the MSCI All-Country World Index. Their bonds and currencies are also up for the year, resulting in a rare trifecta for investors. Morgan Stanley was out with a report Wednesday predicting more gains into year-end. What’s different now is that developing nation economies haven’t squandered the opportunity presented by a rare synchronized global economic recovery. Foreign-exchange reserves for the 12 largest EM economies, excluding China, have risen to $3.08 trillion from $2.89 trillion at the end of last year, providing a nice cushion in times of turmoil.