Financial Associated Press, May 5 (editor Ma Lan) the direction of emerging market bonds and currencies is rapidly changing. The beginning of the yearPokerchipsvideoA bunch of Wall Street institutions are betting that this year will be a year for emerging markets to recover, but they called an emergency halt after emerging markets tumbled in April.
Phoenix Kalen, head of emerging markets research at Soci é t é G é n é rale in London, said people were previously optimistic about beating their peers, but now they are disappointed. Inflation has proved to be a thorny problem for central banks, so optimism about emerging market interest rates this year has indeed collapsed.
In April, the MSCI developing country currency index fell 0. 5%Pokerchipsvideo.6%, while another emerging market dollar bond index fell 2%. All of these indicators rose at the end of last year on expectations that the Fed would start cutting interest rates in 2024.
Societe Generale believes that the risk of stagflation in the United States will further punish emerging market currencies and short-term bonds. Hedge fund Mackay Shields said a stronger dollar and a changing outlook for Fed interest rates are dashing hopes of further gains in emerging markets this year.
Worries about stagflation in the United States
Soci é t é G é n é rale was bullish at the start of the year, but turned bearish on emerging market currencies in early February and became more negative in April, Kalen said. One reason for this shift is that the long-term high interest rate environment in the United States will lead to stagflation in the United States.
She expects some form of stagflation in the US, followed by adverse effects on emerging market currencies and short-term emerging market interest rates. Markets that are highly sensitive to US interest rates, such as Turkey, Hungary and Latin America, will be the most affected, while Asia is likely to be less affected.
Valentina Chen, co-head of emerging market debt at Mackay Shields London, points out that the weakening of emerging market currencies against the dollar has a direct impact on asset performance and means insufficient capital inflows. Us interest rates remain high and shrinkPokerchipsvideoThe real spread between emerging markets and the United States. From an arbitrage perspective, emerging market assets are less attractive.
But it's not without a change for the better. Chen stressed that despite high interest rates, growth in many emerging markets has remained resilient, especially in Latin America. Other countries offer a lot of investment opportunities, such as India and Turkey.
She added that the Mackay Shields would remain flexible with respect to emerging market currencies, which tend to be overly volatile at this stage and do not intend to counter the appreciation of the dollar.