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Rate threat to emerging markets

Rising US interest rates are a small danger for emerging markets: a bigger one is a loss of appetite for risk.
Rate threat to emerging markets

Emerging markets investors must be on guard against being misled by the experiences of their formative years.

Back in 1994-95 rising US interest rates triggered a slump in emerging markets. Ever since then, many investors have feared that Fed tightenings are terrible for emerging market equities. With rising rates looking increasingly likely, investors can therefore be forgiven for being worried.

While that experience looms large in our minds, however, it was not typical. In fact, since 1991 there has actually been a slight positive correlation between annual changes in the fed funds rate and MSCI’s emerging markets index, which means that higher interest rates have more often than not been accompanied by decent returns on these stocks. Rising rates in 2005 and 2016-17, for example, saw them do well. And many falls in emerging markets have come without any help from the Fed, such as in 1998, 2001-02 and in 2015.

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