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Why Rising Interest Rates Aren’t Necessarily a Harbinger of Trouble for EMs

Nick Niziolek and Todd Speed

In our July outlook, we noted that many emerging markets have improved their balance sheets, which we believe may make them less vulnerable to an eventual rise in U.S. short-term interest rates. Below, Portfolio Specialist Todd Speed presents some analysis that supports this view.
--Nick Niziolek, CFA, Senior Co-Portfolio Manager and Head of International Research


Todd Speed, CFA, Portfolio Specialist
Many investors are worried about the impact rising U.S. interest rates and a stronger dollar will have on emerging markets, as a rate hike may constrain the availability of credit and further strengthen the dollar. Fueling the fire, recent market headlines that EMs will suffer when the Fed hikes rates and the spillover effect the “taper tantrum” of 2013 created are understandably causes for concern. However, we believe EMs are generally less fragile and better positioned ahead of future rate hikes. Compared to just a few years ago, many EMs have reduced their deficits, and by extension their vulnerability to foreign capital flows, and EM currencies have depreciated versus the dollar. Moreover, in the past 25 years when the 10-year Treasury yield rose more than 100 basis points, EMs have generally outperformed the S&P 500 Index and delivered strong absolute gains. The “taper tantrum” may be more of an outlier than a prediction of things to come. For more on our perspectives on emerging markets, read our recent commentary.

EMs Have Been More Resilient to Rising Rates
Past performance is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Indexes are unmanaged, do not reflect fees or expenses and are not available for direct investment. Rising rate environment periods are from troughs to peak from October 1993 to December 2013. Source: Morningstar and Bloomberg.

Past performance is no guarantee of future results. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

Indexes are unmanaged, not available for direct investment and do not include fees or expenses. The MSCI Emerging Markets Index is a free float adjusted market capitalization index. It includes market indexes of Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The S&P 500 Index is generally considered representative of the U.S. stock market. The Barclays U.S. Government/Credit Index is comprised of long-term government and investment grade corporate debt securities.

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