(Bloomberg) -- Emerging-market assets staged one of their best monthly rallies of the year in November as traders repositioned their portfolios on bets that the Federal Reserve will cut interest rates in the first half of next year.
The MSCI Inc. emerging-market stocks index closed 7.6% higher in November, the largest monthly gain since January, putting it on track for its best year since 2020. Shares in Latin American companies jumped higher on the day and are poised to have their best annual performance since 2017. A similar gauge of currencies went up roughly 2.6% this month, and closed at its highest level since March 2022.
Traders spent the past month bidding up emerging-markets stocks, bonds and currencies as expectations for a decline in US yields and a weaker dollar boosted the outlook for assets outside the US.
The trend has inspired renewed interest in emerging-market bonds this month, helping investors push down the extra yield they demand to hold sovereign bonds over US Treasuries by 24 basis points — the most since July, according to JPMorgan data. For Latin America’s international debt, that spread dropped 20 basis points this month, also the biggest decline since July.
On Thursday, most emerging-market currencies backed off their November rally: 22 of the most-traded currencies declined or held steady against the dollar. The Turkish lira rose roughly 0.3%.
Central European currencies followed the euro lower after a cooler-than-expected slowdown in euro-zone inflation, spurring bets that the European Central Bank would cut interest rates sooner than officials have suggested. Traders are now pricing in a quarter-point cut by April, compared with June just over a month ago.
Read More: Traders Fully Price ECB Rate Cut in April as Inflation Eases
For stocks, some valuation measures suggest a continuing rally in emerging markets.
In a note earlier this week, Hasnain Malik of Tellimer Research wrote that by market capitalization as a percentage of gross domestic product, emerging markets are cheaper than developed ones and frontier markets are even cheaper.
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