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Fed decoupling boosts emerging market stocks, cools currencies
It is not just the early aggressive hikers in Latin America and emerging Europe who are easing - Vietnam and China have also delivered rate cuts in recent months.
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US dollar banknotes are seen in this illustration taken March 10, 2023. (Reuters/DADO RUVIC)
I
nvestors are eyeing gains in emerging markets stocks and a cooling of their currencies amid an unprecedented global decoupling in the direction of interest rates.
While the US Federal Reserve has delivered aggressive interest rate hikes since March 2022, major emerging market countries like Brazil, Chile and Hungary have kickstarted rate cutting cycles to spur their economies.
It is not just the early aggressive hikers in Latin America and emerging Europe who are easing - Vietnam and China have also delivered rate cuts in recent months.
Inflation is coming down rapidly in many developing nations who are unwilling to wait until the Fed - or the European Central Bank or Bank of England - are done with tightening. But this time round the breadth of the easing push is unprecedented.
"We have never seen this on a kind of global level," said Dominic Bokor-Ingram, senior portfolio manager for emerging and frontier markets at Fiera Capital.
"So, individual instances - we've seen lots of decoupling from the Fed, but we have never been able to add up emerging markets and add up developed markets, and come to this conclusion," he said, predicting that emerging equities would benefit from the cost of risk coming down.
An analysis of instances over the last two decades when policy makers in select developing economies eased but the Fed didn't, shows equities in the developing countries usually benefited, according to UBS strategist Manik Narain.
