JPMorgan Private Bank and BlackRock's iShares division shifted allocation guidance on emerging markets during the second week of March, ending a 24-month period in which both maintained underweight recommendations. The move coincides with $12.8 billion in net inflows to EM equity and fixed-income funds since February 28, according to EPFR Global data through March 21.
The MSCI Emerging Markets Index returned 6.2% year-to-date through March 20, outpacing the S&P 500's 4.1% gain for the first time since Q4 2020. The reversal follows a period JPMorgan's Grace Peters termed the "valley of tears"—EM equities underperformed developed markets by 840 basis points from January 2022 through December 2024, the widest two-year gap since the 1997 Asian financial crisis. Valuations compressed to 10.8x forward earnings by year-end 2024, a 38% discount to the MSCI World Index, versus a ten-year average discount of 22%.
The strategic shift reflects three structural catalysts. First, the Federal Reserve's March dot-plot revision lowered the 2025 terminal rate expectation to 3.75%, reducing the dollar-funding premium that penalized EM corporates holding $2.1 trillion in dollar-denominated debt. Second, China's Politburo announced a ¥2 trillion ($280 billion) fiscal package on March 5, front-loading infrastructure spend into Q2 and Q3—the first material easing since the 2020 pandemic response. Third, India's SENSEX crossed 75,000 on March 12, driven by $18.4 billion in domestic mutual fund inflows over the prior six months, evidence of retail capital formation independent of foreign institutional flows.
BlackRock's March rebalancing note cited "mean reversion plus carry" as the core thesis. EM sovereign debt yields average 6.8%, 410 basis points above comparable US Treasuries, the widest spread since 2016. Corporate EM credit, rated BBB- or equivalent, yields 7.2%, compared to 5.1% for US high-yield. The firm raised EM equity allocations in model portfolios from 4% to 7% of total equity exposure, the first increase since October 2021. JPMorgan's tactical committee moved EM equities to neutral from underweight on March 10, targeting a 5% portfolio weight for clients with $25 million or more in investable assets.
Operators and allocators should monitor three follow-on events. The People's Bank of China's April 15 reserve-requirement ratio decision will signal whether fiscal stimulus extends into H2. Mexico's June 2 elections carry implications for nearshoring flows—Nuevo León has absorbed $14.6 billion in manufacturing FDI since 2022, much of it contingent on policy continuity. Finally, the June 12 MSCI rebalancing could add up to 18 Indian mid-cap names, forcing an estimated $4.2 billion in passive inflows within 72 hours of the announcement.
The BlackRock iShares MSCI Emerging Markets ETF (EEM) recorded $1.9 billion in net inflows during the week ending March 14, the largest single-week accumulation since November 2020.