Over the past decade, the sentiment towards emerging markets among sovereign wealth funds has fluctuated. However, the normalization of interest rates is disrupting the status quo, leading to a broadened appetite for these markets. Sovereign investors are seeking new sources of diversification and higher returns across emerging Asia, Latin America, and Africa.
Emerging markets have shown resilience amidst rapidly increasing interest rates, indicating improved institutional strength over the last decade. Many countries have made strides to provide a stable investment environment, attracting sizable investments in sectors such as healthcare, education, and infrastructure. These sectors are appealing due to limited supply in developed markets due to regulation or high competition levels.
India has emerged as a leading player in the emerging markets space. The country is increasingly viewed positively for its improved business and political stability, favorable demographics, regulatory initiatives, and a friendly environment for sovereign investors. India has now overtaken China as the most attractive emerging market for investing in emerging market debt.
The trend of “friend-shoring” and “near-shoring” is also benefiting countries like India, Mexico, and Brazil. This involves increased foreign corporate investment aimed at both domestic and international demand, helping to fund current account deficits and support currencies and domestic assets, including debt.
Central banks are also exploring diversification into emerging market currencies to hedge against volatility. The sentiment towards broader emerging market allocations shifted dramatically over 2022, with 54% of central banks having non-renminbi emerging market allocations in 2023, up from 47% in 2022.
Emerging markets, led by India, are becoming increasingly attractive to sovereign wealth funds and central banks. As these markets continue to grow and develop, they offer a wealth of investment opportunities that can yield high returns.
