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.