Emerging markets show resilience against US Federal Reserve policy

Emerging markets (EM) are demonstrating increased economic resilience despite tightening monetary policy from the US Federal Reserve. Historically, Fed rate hikes forced emerging economies to follow suit to protect currencies and manage debt. However, current trends suggest EM central banks may maintain flexibility due to sturdier fiscal fundamentals, resilient economic growth, and already elevated interest rates.

Data indicates that the weighted average 10-year emerging bond yield reached nearly 6.45% at the end of September, a five-year high. High inflation-adjusted yields have helped restore central bank credibility and create a real rate buffer. This positioning may allow some emerging economies to cut rates in the coming year or avoid following the Fed's tightening cycle in lockstep.

Research also highlights the long-term performance of emerging markets. Over rolling 20-year periods, emerging markets outperformed the developed world 72% of the time and the developed world excluding the US 100% of the time. While the premium has narrowed compared to the early 2000s, the sector continues to offer distinct value and momentum premiums compared to developed markets.