Rising Rates a Risk for Emerging Markets?

| Multi Asset

The path of the recovery in emerging economies is likely to be highly related to the distribution of the Covid-19 vaccine. However, tailwinds coming from the resurgence in commodities, effective fiscal and monetary support, and the rotation toward cyclical assets have set the stage for a supportive framework in the months to come.

One risk to this scenario is the potential normalisation in US rates, which would weigh on emerging market assets due to higher funding costs and the reduced carry that investors would receive on their local currency exposures. However, not all rising rate environments are equal, depending on the phase of the economic cycle and the drivers leading to policy tightening, or normalisation. Emerging markets have historically thrived during rising rate environments when the inflation premium is the driver, less so when growth (real yields) is being repriced.

Although inflation expectations going into 2021 are building, monetary action is poised to limit the absolute rise in yields at sustainable levels. Real yields are therefore expected to remain low, which has historically been supportive for higher yielding and emerging market assets in particular.

 

Rising Rates a Risk for Emerging Markets?
Source: Bloomberg, Unigestion. Data as at 30 November 2020.


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