3 reasons the case for emerging markets is strong 3 reasons the case for emerging markets is strong http://www.federatedinvestors.com/static/images/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\brics-flags-small.jpg July 15 2019 February 7 2019

3 reasons the case for emerging markets is strong

A Fed on pause, an easing of trade worries and the pricing in of most geopolitical worries make for EM tailwinds.
Published February 7 2019
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  1. The Federal Reserve is on pause.  Monetary policy divergence between the U.S. and the rest of the world was one of the main reasons why the U.S. dollar strengthened in 2018, creating a negative impact on international currencies. Unless the inflation picture changes significantly over the next few months—and we don’t believe it will—the possibility of multiple rate hikes is highly unlikely. This shift in monetary policy is a strong positive for non-dollar assets, including emerging-market (EM) fixed income.
  2. Trade worries have decelerated.  U.S. trade tensions with China have been a major headwind for all international fixed income assets over the past year. Along with major disruptions to global supply and distribution chains, it’s becoming clear that both countries recognize the damaging and potentially lasting effects of an extended trade war on their own economies. Our view is that a resolution of these tensions is the more likely outcome, resulting in a positive effect on global growth and global assets.
  3. Most geopolitical concerns have been priced in. Of the many idiosyncratic risks that stressed the market last year—such as the Nafta renegotiation, elections in Latin America, Turkish politics and even Brexit—most are already heavily discounted by the market, if not on the path to resolution. A risk that is already discounted is less of a risk and more of an opportunity.

As always, volatility remains a key consideration—the daily headlines underscore that reality. But our view is that the myriad risks that clouded EM fixed income in 2018 have been well vetted by the markets. For 2019, those bouts of volatility can serve as attractive entry points for investors.  

Tags Fixed Income . International/Global .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

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