Emerging Markets: Specialized Stock Buying Persists in EMEA – BNY

BNY analyst Geoff Yu noted that equity fund flows within emerging markets are showing significant divergence, with stock markets in Europe, the Middle East, and Africa (EMEA) consistently attracting specialized buying since before the July Fed meeting, outperforming other emerging market regions.

**Poland, South Africa, Turkey Lead Inflows**

According to BNY, buying pressure is particularly strong in the stock markets of Poland, South Africa, and Turkey. The notable aspect is that currencies and bond markets in these countries have been weak over the same period, suggesting the equity inflows are not driven by broad optimism about local macro fundamentals, but rather selective positioning in specific sectors or undervalued pockets. This pattern of "strong stocks, weak bonds, and soft currencies" implies investors are adopting a highly differentiated strategy in EMEA.

**Divergence Between Fund Flows and Macro Backdrop**

Typically, the appeal of emerging market assets is closely tied to expectations for Fed monetary policy. However, BNY highlights that this round of EMEA equity buying, which started before the July meeting and has persisted, spans a period of volatile market expectations for the Fed's rate path. The continued equity inflows despite pressure on regional currencies and bonds suggest the drivers may stem more from industrial relocation opportunities under global supply chain restructuring, or a repair of deeply undervalued valuations in some markets, rather than purely liquidity-driven factors.

**Investors Should Focus on Structural Opportunities**

BNY's observation aligns with earlier calls from some institutions to broaden portfolio horizons. With the potential for the global equity rally to expand further, parts of the EMEA region are becoming a focus for diversified allocation. However, given the weakness in currencies and bonds, investors chasing stock opportunities in these markets should also be wary of potential erosion of final returns from currency fluctuations.