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A growing chorus of U.S.-based fund managers is betting that emerging market stocks and bonds are poised to outperform U.S. assets this year. The momentum for emerging markets has grown so strong that it has become almost a consensus trade, with investors even urging clients to buy EM junk bonds.

What's happening: Following 2019's blowout returns for U.S. stocks and strong performance for high yield, government and even municipal bonds, investors expect U.S. assets to fall to earth in 2020 and are positioning in emerging markets.

  • Companies located in emerging markets sold a record $118 billion of high-yield dollar bonds last year, doubling the pace from five years before, according to Dealogic, and are expected to see even more allocation in 2020.
  • In November, Henry Schwartz, founder of data provider Trade Alert, wrote in a note that investors had gone on a "spending spree" buying call options of the ETF that tracks EM equities.

What they're saying: "Emerging markets present top 2020 opportunities," UBS Global Wealth Management's CIO Mark Haefele wrote in a recent note to clients.

  • "Emerging market debt surfaced as our top choice," JPMorgan Asset Management CIO Bob Michele wrote in a late December note.
  • "The emerging markets will be the big winner of 2020," Jim Paulsen, chief investment strategist at The Leuthold Group, told CNBC.
  • “Don't stop believin' in Emerging Markets," analysts from Wasatch Global Investors titled a recent note to clients.

Further, top analysts at Deutsche Bank and Schroders have said they expect EM currencies to outperform in 2020, and Morgan Stanley and Citigroup are betting on emerging fixed-income assets.

Why it matters: Bullish fund managers are putting their money where their mouths are, laying down bets that EM equities, debt and currencies are primed to deliver solid returns for their clients, which include pension funds, retirement accounts and endowments, among others.

Yes, but: While emerging nations like India, South Africa, Brazil and Mexico have typically had stronger economic growth than developed countries like the U.S., Japan and Germany, that may not be the case in 2020.

  • If growth doesn't deliver, asset prices are unlikely to see significant gains, derailing the popular theme.

Threat level: Major asset managers largely ignored EM for years and they now may be facing “secular stagnation,” and a breakdown of growth, Robin Brooks, managing director and chief economist at the Institute of International Finance, warns.

  • Emerging countries also are facing challenges like "increased automation, climate change and de-globalization," which are "possible threats to potential growth in the decades to come."

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