‘Emerging markets crisis’? That’s a wildly overstated view, say our experts

Some analysts have described a pattern of a weaker dollar and rising bond yields in the US as a ‘classic emerging markets crisis’.

“As veterans of actual emerging crises dating back to 1994, we consider that view to be wildly overstated,” writes Pendal’s EM team in their latest analysis.

In spite of volatility and weakness in core US financial markets, the currencies of almost all emerging markets strengthened against the US dollar in March and April. Meanwhile bond yields fell for the majority of major EMs.

“Emerging markets are driven by two major global drivers: international capital flows and international trade.

“A weaker dollar represents capital flowing out of the US and into the rest of the world – and a weaker dollar has consistently been positive for emerging markets over the past 30 years.

“Although evolving tariff policies threaten a downturn in global trade, the message from financial markets is that investor uncertainty about US economic policies is a clear positive for emerging economies and for investors in emerging markets.”

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Amy Xie Patrick: China, the US, and the value of uncertainty

This month’s divergence in US and China rates policies wasn’t just a curiosity for money managers, observes Pendal’s head of income strategies, Amy Xie Patrick.

“It’s a study in contrasts, a reflection of deeper structural differences, and a reminder that policy effectiveness doesn’t always come wrapped in transparency or even democracy,” says Amy in her latest markets analysis.

On May 7, the US Fed left rates unchanged despite growing political pressure. Meanwhile, the People’s Bank of China delivered another dose of stimulus.

“One central bank faced market criticism over its non-committal guidance,” notes Amy. “The other moved swiftly and silently, without needing to justify its decision.

“Perhaps the most contrarian yet valuable takeaway is that less policy guidance may be a good thing.

“By avoiding the hard task of forecasting far into the future, we free ourselves from unhelpful narratives may that turn out to be false.

“By focusing on getting it right rather than always being right, we’re able to preserve the flexibility to change course when the fundamentals change.”

Read Amy’s full article here