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Time to sell emerging markets?

It’s time to dump emerging markets. That’s the message of the fact that MSCI’s emerging markets index (in US dollar terms) has fallen below its 10-month average. A rule to sell whenever this happens would have increased long-run risk-adjusted returns in the past because it would have saved us from big losses in 1995, 1997-98, 2000-01 and 2008-09.

In fact, there’s another reason to sell. US interest rates are likely to rise next year. Futures markets are pricing in a half-point rise with more to come in 2023. On some previous occasions (such as 1994-95, 2000 and 2018) even widely expected rises in US rates led to losses on emerging markets. This is because higher US rates reverse the 'reach for yield': why take the substantial risks of holding emerging markets when you can get good safe returns on US cash.

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