Emerging market assets seeing better support

Emerging markets (EM) have been a primary beneficiary of the return of risk appetite. This might seem counter-intuitive given the negative impact on global growth, but the broader shift in central bank policy towards less tightening and more easing probably does offer more support to EM assets, offsetting the marginally negative economic impact. Most importantly, US dollar strength relative to the Euro and British pound sterling did not spread to the EMs. In fact, EM currencies have remained well supported against the US dollar, sustaining significant capital flows to EMs. This can be seen in particular with local currency bonds in the hunt for yield given developed market bond yields continue to compress to multi-century lows. The shift in risk appetite is supported by relative fundamentals. EMs are among the few countries left with conventional yield curves and positive real yields that offer their central banks the capacity to cut rates as inflationary pressures ease. The prospect of broader global easing means that opportunities in EMs are increasing, albeit selectively and on a hedged basis. (VIEW LINK)