Emerging-Market Stocks Rise to Six-Month High Versus S&P 500

Emerging-market stocks extended their lead over US shares in the early days of the new year, with the equity benchmark rising to a six-month high against the S&P 500 Index.

The MSCI Emerging Markets Index has advanced 3% this week, compared with a 0.8% decline in the US gauge, continuing a turnaround that began in recent months following its worst annual losses since the 2008 global financial crisis. China’s reopening, a softer dollar, and signs of easing global inflation have been spurring gains, leading the gauge to rise Friday for a fourth day to its highest since August.

Its rally mean developing-nation shares have handed investors an excess return of almost 19% over their New York-listed peers since late October. Options traders are betting this gap will widen, and cutting their expectations for volatility in emerging markets, while raising them for the US.

“There is increasing evidence that the outperformance of the broad EM index versus the S&P 500 could continue, as we face a peak in US rates, a weaker dollar and a counter-cyclical recovery in China, which should ultimately benefit the emerging markets outside Asia,” Nenad Dinic, an equities analyst at Bank Julius Baer in Zurich, said.

EM stocks have been struggling for a half-decade, and in 2022 they fell to their lowest level since 1988 relative to their US peers. Dragging them down were a succession of risks faced by their economies, from the US trade war with China, to the onset of the pandemic and then Russia’s invasion of Ukraine and a pivot to a rate-hiking path by the Federal Reserve. China’s Covid lockdowns added to the pressure on the asset class.