Warning from Central Bank Managers: Signs of Overheating in Emerging Markets

Warning of Excess Crowding in Emerging Markets

Fund managers are highlighting that investments in the Brazilian real and AI-related stocks have become excessively crowded. This situation could leave investors facing unseen risks.

Critical Assessment from Wells Fargo

According to Wells Fargo Securities' analysis, the valuations of Latin American currencies, which are expected to perform best in carry trade in 2025, are diverging significantly from important fundamental indicators. Brendan McKenna, Wells Fargo's emerging markets economist, commented, "Investors are overly confident in emerging markets. This trend is quite tense for most currencies. While they may perform well in the short term, a correction seems inevitable."

Increased Risks, Growing Concerns

Fidelity International has expressed concerns over less liquid markets in Africa in the event of increased global volatility; meanwhile, Lazard Asset Management noted that caution is warranted following the worst wave of sales in Asian technology stocks since April.

Interest Rate Cuts and the Dollar's Situation

Fund managers believe that the Fed's interest rate cuts and the depreciation of the dollar have intensified overheating in emerging markets. This situation carries risks of sudden declines that could potentially tighten liquidity.

Changing Trends Among Investors

A survey conducted by HSBC Holdings Plc revealed that in September, 61% of investors held net weighted positions in local currency-denominated emerging market bonds. This figure was 15% in June.

Anthony Kettle from RBC BlueBay Asset Management stated, "As the year draws to a close, some investors are trying to profit from trades that were successful in 2025, which may increase volatility in the currency markets."