Eyes on interest rates

Low interest rates in the US may lead to improved opportunities in emerging markets.

01 Jul 2019

Key takeaways

  • Federal Reserve and European Central Bank leaders have quickly moved toward policies of easing.
  • Trade tensions remain high between the US and multiple key emerging market trade partners.
  • Current conditions indicate several potential emerging market investment opportunities.

In the United States, the focus fell on Fed Chair Jay Powell and US interest rates. The Fed Chair spoke on implementing the best monetary policy to prevent inflation and economic problems rather than follow a reactionary approach after the fact. The Federal Reserve and the European Central Bank have both shown willingness to move policies toward easing. However, detractors warned of bubbles and limited options to turn around world economies in the event of a future recession.

For now, that means lower yields in developed markets and higher relative yields in emerging markets. Just don’t lose track of trade tensions between the US and emerging market trade partners. Trade tensions between the US and China, India, Mexico and Russia open up risks for future disputes.

Current opportunities include an investment in high-yielding emerging market currencies against lower-yielding currencies outside of the US-China dispute. Emerging market equities have underperformed emerging markets year-to-date, but with attractive relative valuations, emerging market stocks may be poised to make up ground. But don’t lose track of USD-denominated emerging market bonds, which also offer long-term opportunities for risk-adjusted gains.

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