The hopes of emerging markets’ bulls are riding on the odds of an economic recovery in China and a Federal Reserve pivot this year. They claim that the stage is now set for a long-awaited, broad rally in the asset class. But let’s not dwell on conclusions just yet.
As currencies rose to their highest since June on Monday, emerging-market equities were on track for a bull market. This would be the first since 2020. Egypt’s latest devaluation and the Turkish lira’s all-time low were two significant sources of stress.
Supporters of former President Jair Bolsonaro stormed the nation’s capital on Sunday. They challenged the new leadership of President Luiz Inacio Lula da Silva. Hence, Brazil faced turmoil as yields on its dollar bonds rose.
Brendan McKenna, a foreign-exchange strategist at Wells Fargo Securities in New York, is an emerging-markets economist. He believes that this year, the asset class will recover. Yet, the capacity to endure discomfort in the short term is required. He recommended taking a “tactical and selective” approach.
Investors Impatiently Await the Central Bank’s Signals
It isn’t enough for the US central bank to pause rate increases for some investors in riskier developing-economy assets. It must also indicate that it is about to start slashing them.
The Treasury yield curve has shifted dramatically, which will provide a strong signal from the US bond market. Shorter-dated securities gain more than long-dated securities, resulting in a yield differential of more than 2%.
The Fed may pivot in the coming months, just as a policy-driven growth acceleration in China stimulates demand for developing nations’ products, according to Eurizon SLJ Capital money manager Alan Wilson.
Wilson expects local-currency debt to lead the way, followed by foreign debt, owing to a positive outlook for developing currencies.
Of course, there’s no way of knowing the certainty yet. Fed Governors issued an unusually blunt warning to investors in recent meeting minutes, cautioning against underestimating their desire to keep interest rates high for some time after increasing rates at the fastest pace since the 1980s.
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