Rising interest rates and inflation have kept emerging markets (EM) bulls from charging. But an improving macroeconomic environment could potentially be underway after the Federal Reserve’s recent rate pause.
Of course, a pause doesn’t necessarily mean economic conditions are actually improving. Nonetheless, a rate pause could be an early indication for EM investors that a risk-on sentiment could be increasing. That could eventually spill over into emerging market assets.
“Emerging-market equity investors are signaling they’re done running for safety and are hungry for risk,” Bloomberg reported.
As the Bloomberg report mentioned, EM investors are coming out of safe haven assets and back into riskier investments like EM. To tamp down the effects of inflation, the Fed has been tightening monetary policy and forcing the dollar higher. That doesn’t typically bode well for EM countries since their local currency is tied to the performance against the dollar.
When the opposite happens, more investor faith goes back into emerging markets. That’s exactly what’s been happening the last few weeks. Furthermore, risky assets like growth stocks have also been seeing investor allocation. This further supports the notion that risk-on is currently prevailing in the capital markets currently.
“Stocks in developing nations have added $1.1 trillion in the past two weeks as anxiety about global interest rates gives way to optimism the Federal Reserve has reached the end of its tightening phase,” the Bloomberg report added. “What’s more, growth stocks are heading for their biggest three-day gain against the more sedate value stocks since March.”