INVESTMENT FOCUS-As Fed looms, emerging markets may evade 2013-style rout
By Sujata Rao
LONDON, Sept 12 (Reuters) - Just as vaccines work by stimulating the body's immune system, last year's selloff may have helped emerging markets build defences against the damage they have suffered during past U.S. rate rise cycles.
This week's market moves are rekindling memories of past emerging market crises, after a paper from the San Francisco branch of the U.S. Federal Reserve sparked a surge in the greenback and U.S. yields, an issue which is likely to be debated at next weekend's G20 meeting of world powers.
The paper confirmed what many have long suspected - markets have been too conservative in pricing rate rises. Fed officials expect rates to be 1 percent and 2.5 percent by end-2015 and end-2016 respectively, a quarter percentage point above what was priced.
Just how bad a hawkish Fed can be for emerging markets is well-documented. Last year a mere hint from it about cutting back - or tapering - bond buying - set off a storm that knocked 10 and 20 percent respectively off emerging currencies and stocks. Local bond yields surged 200 basis points on average.
For market participants, 1994 is etched in memory as the year when a shock rate rise crushed U.S. Treasuries, eventually sparking Mexico's "tequila" crisis and paving the way for the Asian crash of 1997. Similarly, Fed action in 1999 had a role in the Russian, Brazilian and later Turkish and Argentinian crises.
So emerging market investors should be running scared. Instead, many appear remarkably sanguine.
"Investor appetite is in favour of emerging markets more than at any time in the past 12 months," said Valentijn van Nieuwenhuijzen, head of multi-asset investing at ING Investment Management who moved his portfolio into an overweight on emerging debt and equities at the end of March this year. Continuación...