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Emerging market equities scored record inflows in the week to January 24, following a rapid start to the year for sovereign debt issuance among developing economies. Investors are likely front-running an expected weakening of the US Dollar, which could ease the debt burden many emerging markets face and bolster earnings among EM firms with a favorable translation effect. 

A potential issue with the recent big inflow, however, is that it was heavily concentrated among Chinese stocks. Though EM shares outside of China have largely diverged from those traded in Shanghai or Hong Kong over the past few years, the headwinds China has faced is likely generating a drag on other developing economies and broader EM-focused indices.

Related ETFs: iShares MSCI Emerging Markets ETF (EEM), iShares MSCI Emerging Markets ex China ETF (EMXC), iShares MSCI China ETF (MCHI)

Bank of America counted a record $12.1 billion of funds rushing into emerging-market stocks in the week to January 24, a seemingly positive signal for the long-underperforming class of equities that has been suppressed by the resilience of the Dollar for the better part of two years now.  When the Dollar appreciates in value compared to local currencies in emerging markets, the servicing of USD-denominated debt becomes more costly on a relative basis. However, the opposite case could soon take place, with EM debt loads becoming more manageable.

As of 2019, about two-thirds of external debt in EM economies was denominated in USD. By October 2022, Bank for International Settlements (BIS) data showed non-financial dollar-denominated debt in emerging economies stood at $4.2 trillion. This tally could be set to rise materially as developing economies got off to a record pace of debt issuance in the early part of 2024. Per the Financial Times, that cohort auctioned record $51 billion in the first days of the new year, according to Dealogic data. That compares with $42 billion in the same period last year. Part of that sum came from the largest issuance of Saudi sovereign debt since 2017, which MRP…

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