BlackRock upgrades EM stocks to overweight

World’s biggest asset manager BlackRock upgraded its view on the emerging market stocks from ‘neutral’ to ‘overweight’ on Monday. It said that the lower expectations of a rate hike from the U.S. Federal Reserve had led to the weakness in the U.S. dollar and that makes the emerging market assets relatively attractive.

This year, emerging markets’ stocks have outperformed their developed market peers. MSCI emerging market index, after dropping to the lowest point in January has rallied more than 31 percent. However, they are still down from their 2014 peak. Another 20 percent rally would push the index to its 2014 peak.

Emerging market bloodbath began in 2013 with the rise in the U.S. dollar exchange rate. BlackRock is probably pointing to the reverse of that cycle.

According to Richard Turnhill, BlackRock’s Global Chief Investment Strategist, weaker dollar due to diminished interest rate outlook from the United States and rise in oil prices have supported the EM assets and made them attractive. The 'lower for longer' outlook in the developed has also raised the prospect of rate cuts from EM central banks.

In addition to that, BlackRock calculates that EM stocks are trading at 24 percent discount to their developed market peers. According to EPFR data, $26 billion has so far flown into emerging market this year and the asset manager thinks that more is likely.