Rate Hikes May Boost EMFX
July 02, 2021
Read Time 2 MIN
Emerging markets currencies (EMFX) adjusted sharply downwards following a more hawkish Federal Reserve (Fed) outlook, but we believe there are several tailwinds that may allow EMFX to continue the rally that began in April and drive local currency sovereign bond returns higher. Although the market reacted swiftly to the re-alignment of the dot plot1 and prospect of tapering, rate increases are still not expected by the Fed until late 2023. Meanwhile, several emerging markets central banks have already started hiking aggressively, and emerging markets as a whole are biased towards higher rates.
Forecasted EM and DM Policy Rates
Source: J.P. Morgan. Forecasts by J.P. Morgan research team based on economic projections and current central bank policies.
In mid-June, Brazil’s central bank hiked its SELIC benchmark rate2 by 75 basis points in order to combat higher inflation, bringing it back to pre-pandemic levels with a continued tightening bias. Russia also hiked this month, and BRL and RUB were among the top performing currencies month-to-date (as of June 22, 2021). Hungary and the Czech Republic are also expected to continue to raise rates. Even Mexico, so closely tied with the U.S. economy, pre-empted the Fed with a surprise rate hike in late June. Not all countries are ready to hike, preferring to support economic growth in the face of higher case counts in some areas. Fortunately, many emerging markets have the luxury of positive real rates.
In addition to pushing up the carry earned on local currency bonds, rate hikes may support local currencies as an offset to tighter financial conditions in the U.S. As the perceived hawkishness of the Fed increases, we believe more emerging markets central banks may act quicker in an effort to not fall behind. When accompanied by higher economic growth, driven by continued vaccine roll-out as well as the potential for higher commodity prices, many currencies may stand to benefit. To the extent the recent decline in metals and other raw materials has impacted certain currencies, investors expecting inflationary pressures to resume may find an attractive entry point through emerging markets local currency bonds. It’s also important to remember that overall currency valuations remain at extremely depressed levels relative to history.
1 The dot plot shows where each member of the Federal Open Market Committee (FOMC) thinks the fed funds rate should be at the end of the year for the next few years.
2 The SELIC rate is the Brazilian federal funds rate.
Please note that VanEck may offer investments products that invest in the asset class(es) discussed herein.
This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed in this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All investing is subject to risk, including the possible loss of the money you invest. Bonds and bond funds will decrease in value as interest rates rise. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
September 21, 2022
The Fund continues to outperform its benchmark year–to–date, in part, benefitting from its continued conviction that China property–sector bonds are oversold and underpriced.
September 02, 2022
Emerging markets corporate bonds’ strong fundamentals help to cushion the impact of rising U.S. interest rates as recessionary risk grows.
August 23, 2022
The Fund continues to outperform its benchmark year-to-date, in part due to its exposure to high-beta EMFX, particularly in Mexico, South Africa, Brazil, Colombia and Poland.
July 26, 2022
We believe curve inversion is imminent, and will have very different asset price implications than a shift up in the yield curve – it is bullish for both low-beta duration and the USD generally.