Further reiteration that the US Federal Reserve will only gradually raise interest rates has bolstered demand for riskier assets that have performed well as a result of a weaker US dollar.
Due to the dollar’s relative weakness, one of the worst performing emerging market currencies, the Brazilian real, has risen 18% against the greenback. It is currently trading at 3.52421 to the dollar.
However, interest in, and therefore the performance of emerging markets should not be governed by the Fed’s actions. “The fear surrounding Fed interest rate rises and the impact on emerging markets has been taken out of proportion,” said Hans Humes, CEO of Greylock Capital Management.
He added that basing fixed income decisions on the actions of the Fed should not be the main concern for an investor.
In addition to a weakened dollar, as a result of the US Fed’s policy, China’s economy has had a positive impact on the performance of emerging markets, which has affected investor interest.
The country’s relationship with many other emerging market economies revolves around commodities. The recent rise in commodity prices, and therefore performance of many emerging markets, is linked to increased Chinese demand.
Humes stated that at the G20, the Chinese stated that the commodity selloff was overblown, signalling that they will soon start buying commodities for a number of projects, for which it will need to raise debt.
Although there are concerns amongst investors that China’s debt exposure is increasing, Humes noted that there is a good possibility that the government can control the debt situation for the next few years.
As a result, many emerging markets can enjoy the dual benefits of a weakened dollar and increased export revenues from Chinese demand.