With US Tightening Expected to Continue... Emerging Market Stocks and Bonds Rally Falters

JP Morgan Emerging Market Bond Index Down 1.3% This Month
MSCI Emerging Market Equity Benchmark Also Falls 1.6%

[Asia Economy Reporter Kwon Haeyoung] Emerging market stocks and bond markets, which had been rallying since the end of last year, are now sluggish. As U.S. economic indicators such as employment, inflation, and consumption continue to show strength, it is analyzed that the Federal Reserve's (Fed) tightening stance is expected to persist for the time being, dampening investor sentiment.

[Image source=Reuters Yonhap News]

According to the Wall Street Journal (WSJ) on the 15th (local time), JPMorgan's Emerging Market Bond Index fell 1.3% so far this month. The Morgan Stanley Capital International (MSCI) Emerging Market Stock Benchmark also dropped 1.6% during the same period. Emerging market asset markets had sharply declined last year due to high-intensity tightening by major countries and the rise in the dollar's value, but rebounded since last fall amid expectations of a pause in interest rate hikes. WSJ analyzed, "Concerns about U.S. monetary policy are resurfacing," and "the heat of the fierce rally in emerging market stocks and bonds over the past few months may cool down."

Investor sentiment toward emerging market assets weakened as strong U.S. economic indicators were consecutively released. With U.S. economic data significantly exceeding market expectations, concerns are growing that the Fed may resume high-intensity tightening. This is negative news for emerging market stocks and bonds. As investors flock to the safe-haven dollar, demand for risk assets such as emerging market investments decreases. On the same day, the U.S. Department of Commerce announced that January retail sales increased by 3% compared to the previous month, marking the largest increase in 22 months since March 2021. New jobs last month rose by 517,000, nearly three times the market forecast, and the Consumer Price Index (CPI) inflation rate was 6.4%, with a monthly increase of 0.5%, larger than December's 0.1%.

David Hauner, Head of Emerging Market Strategy at Bank of America (BoA), said, "The market knows that emerging markets have run quite a bit, and that the U.S. will go in one of two directions: either economic growth worsens or the Fed raises rates further." He added, "Both scenarios will be a burden on emerging markets in the short term, but if the Fed's tightening policy eases, the rally could resume."

Volatility in emerging market stocks and bond markets is expected to increase further for the time being. Sarah Groot, an analyst at Goldman Sachs, predicted, "Emerging market asset markets already have sufficiently high valuations, so they will face difficulties in further gains for the time being." She continued, "Global growth improvements and inflation easing are positive for emerging markets, but many aspects related to this were already priced in during November and December of last year, which poses a challenge for investors." In other words, stock prices have already risen as much as they can.

There are also criticisms that the optimistic outlook that China's 'reopening' (resumption of economic activities) will act as a positive factor for emerging markets is overly optimistic. Sami Muaddi, portfolio manager at T. Rowe Price, pointed out, "Some investors are too optimistic about the potential growth driver effect of China's reopening," adding, "Looking at the past 15 years, China's economic recovery has acted as a strong driver for emerging markets when accompanied by monetary policy."

This content was produced with the assistance of AI translation services.