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Act now on emerging markets before Fed moves, UK analyst urges

Patrick Buncsi24 January 2024
US Federal Reserve interest rates

As uncertainty surrounds the US Federal Reserve’s next move on policy rates, a leading UK analyst has urged “astute investors” to capitalise on high-performing emerging markets now, with a weakened USD expected to see a “surge of liquidity” into developing markets.

Nigel Green, chief executive and founder of deVere Group, a UK-based financial consultancy, believes that while there is every chance that the US central bank will move on interest rates at some point this year, particularly as inflation concerns continue to abate, markets may be “getting ahead of themselves with the idea that the Fed will imminently start cutting rates”.

“With this in mind,” Green said, “investors should now be looking ahead and eyeing opportunities in emerging markets.”

The US’s S&P 500 index reached a record high of 4,850 at close on Monday, up 2.1% on the year to date, which, according to DeVere, has come off the back of an expected Fed rate cut – the first in more than three years.

However, Green added, a rate cut should not be considered a given.

“A dovish Federal Reserve” – that is, one that avoids aggressive policy rate tightening, particularly against the recent backdrop of historic ‘inflation-busting’ activity – “typically results in a weaker US dollar”.

“As the dollar depreciates, it enhances the attractiveness of emerging market assets.”

Additionally, a more restrained Fed can lead to a “surge in liquidity” moving into markets beyond the US.

This, according to Green, creates an environment that is “conducive to investment and economic growth” in ex-US and other ex-developed markets.

EMs a ‘haven for higher returns’

Emerging markets with “high-yielding currencies and robust economic fundamentals” have increased their appeal for investors “seeking returns beyond what mature markets can offer”, Green said.

“This currency play is often a significant driver of returns for those strategically positioned in emerging market assets.”

Emerging market investors can also capitalise should the Fed opt for a rate trim. Lower interest rates at home, Green said, can encourage local investors to seek yield abroad.

“In a lower-interest-rate environment, emerging markets often stand out as havens for higher returns. These markets frequently offer more attractive yields on equities and fixed-income securities compared to their counterparts in developed economies.”

Indeed, a shift in monetary policy from the Fed does not necessarily augur poor outcomes for globally minded investors, with benefits to be reaped from currently favourable valuations in emerging markets.

Many of these markets, according to Green, exhibit “more attractive price-to-earnings ratios and other valuation metrics” compared to their developed counterparts.

According to DeVere, “the asymmetry in valuations presents an opportunity for investors to capitalise on potential upside in an environment where mature markets might be more fully priced”.

Green concludes: “While markets may be prematurely pumped in anticipation of the Fed’s pivot, the rationale for global investors to now explore opportunities for portfolio growth and resilience by considering exposure to emerging markets is robust.”


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