Fed sneezes, but emerging markets aren't catching a cold yet
TLT•Emerging markets may have room to hold or cut rates as the Federal Reserve tightens, supported by resilient growth, elevated yields and stronger fiscal fundamentals. The average 10-year emerging-market bond yield was nearly 6.45% at the end of September, while the IMF projects emerging-market debt at 77.2% of GDP this year, versus 108.2% for advanced economies.
1. Rates leave room
Emerging-market central banks may not need to follow the Federal Reserve’s rate hikes in lockstep, and some could begin cutting rates next year. The weighted average 10-year emerging-market bond yield was nearly 6.45% at the end of September, near a five-year high, while average inflation-adjusted yields were close to 3%.
2. Investors favor EM
A survey at the International Monetary Fund and World Bank meetings found that 33% of investors favored emerging-market stocks, compared with 26% who preferred developed-market equities. A separate fund manager survey found a net 34% were overweight emerging-market stocks, down from 38% in September.
3. Debt and policy diverge
The IMF projects emerging-market debt at 77.2% of GDP this year, rising to 86.2% in five years, compared with 108.2% and 114.8% for advanced economies. Policy responses vary: Brazil and Mexico are cutting rates, while South Africa and South Korea are raising them to offset currency weakness or inflation.
