Emerging market investors dive for stocks amid Fed storm

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A more aggressive tightening cycle by the Fed and other top central banks could quickly reignite bond market pressures

Developing world investors, buffeted by various “taper tantrums” over the last decade, are now nervously watching as the rainmaker of global markets – the U.S. Federal Reserve – readies its most aggressive rate hike cycle in 17 years.

“The outperformance of EM after the first hike is notable,” they said, noting that in Fed hike cycles since 1980, the MSCIEF has been up 17% on average six months after the first rate increase is delivered. One silver lining in last year’s rout of Chinese stock markets is that many investors think they have a good chance of rebounding this year with authorities there now providing support to the economy again.

The “taper tantrum” shock of 2013-14, when the prospect of a reduction in post-financial crisis support from the Fed hit emerging market assets hard, still haunts EM veterans. “We would normally expect these forces to drive greater dollar strength, but EM FX spot returns are +1%.” “During large moves, we find that all countries have provided negative returns during periods of extreme bearish moves in U.S. Treasuries,” Deutsche’s analysts said, showing that bonds from Turkey, the Philippines, Mexico and Peru posted the biggest losses.

 

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