Market Memo: 'Taper,' the word, no longer makes EM shiver

10-10-2017

There’s no question the Federal Reserve has communicated and planned its balance-sheet taper well. But the reason emerging markets didn’t throw a tantrum like they did in 2013 is due in large part to positive changes EM countries have made since then. In many regards, they are healthier and more resilient than ever—and increasingly more diverse, too.

Indeed, the days of viewing EM as a single market with similar problems are long gone. Diversity isn’t a catchphrase, it’s a reality, with different regions in different stages of economic cycles. That’s what makes EM attractive for all portfolios, especially now as we see improvements in developed markets.

If there’s a common denominator, it’s that the fundamentals of many EM regions have vastly improved in the last four years. Internal drivers vary across regions and in type—some are politically driven, some are commodity driven, some are policy driven. But in general these economies have stronger footing, with the Emerging Markets Government Bond Index (EMGBI) up nearly 9% year-to-date.


But that doesn’t give enough credit to how most EM countries have adjusted since mid-2013’s taper tantrum. Many have reduced their dependence on the developed world, with local corporations looking to other sources for funding, deleveraging in the process and taking on less dollar debt. Countries have stopped protecting their currencies, and their central banks have assumed more independence to set monetary policy.

There are still risks. If Janet Yellen doesn’t get another term as Fed chair and Trump-nominated board appointees shake up the taper process, emerging markets could wobble again. Even the gradual roll-off of the Fed’s maturing securities could spook global markets at some point.

We think, however, that the lion’s share of EM countries are in much better shape and can withstand the current modest policy shifts that have been laid out by the Fed. Nearly half a decade after former Fed Chair Ben Bernanke uttered the word “taper’’ and set off a panic,  it’s a new landscape.