Rising US interest rates used to be fatal for emerging markets (EMs), says Soumaya Keynes in the Financial Times. US rate hikes would prompt global investors to sell EM shares, sending local currencies spiralling and deepening dollar-denominated debt burdens. Yet on the whole EM economies have held up remarkably well during the latest US hiking cycle. EM central banks were quicker than their rich country counterparts to take inflation seriously. By the time the Federal Reserve began raising rates – too late – in 2022, Latin American central banks “had already tightened monetary policy by an average” of four percentage points. Sound policymaking also makes investors more willing to lend to EMs in their own currencies rather than US dollars, reducing the exchange-rate risks that proved so damaging in past crises.
A disappointing decade
Economic resilience has not translated into stock gains. The average investment company in the global EM sector has generated a return of 70% over a decade, badly lagging the 212% global average (which is heavily US-focused), says the Association of Investment Companies. EMs have outrun global markets in only two years out of the last ten (2016 and 2022). Prolonged underperformance has left EMs “under-owned, underestimated, and undervalued”, says Andrew Ness of Templeton Emerging Markets. On a price-to-book value basis, the MSCI EM index is on a discount of 45% to its developed market equivalent. Yet EMs contain many “best-in-class companies”, exposed to growing middle classes, commodities and technological innovation. These look like “growth stocks at value
