By Karin Strohecker and Giorgelina de Rosario
LONDON (Reuters) – Amid unprecedented global interest rate decoupling, investors are eyeing rising emerging market stocks and cooling home currencies.
While the US Federal Reserve has implemented aggressive rate hikes since March 2022, major emerging market economies such as Brazil, Chile and Hungary have begun rate cutting cycles to stimulate their economies.
It’s not just early aggressive rate hikers in Latin America and emerging Europe that are easing, but Vietnam and China have also cut rates in recent months.
Inflation is falling rapidly in many developing countries and they don’t want to wait until the Fed, European Central Bank and Bank of England finish tightening. However, the breadth of this mitigation push is unprecedented.
“We haven’t seen this on some kind of global level,” said Dominic Bokor-Ingram, senior portfolio manager for emerging and frontier markets at Fiera Capital.
“In individual cases, we have seen a lot of decoupling from the Fed, but we have never combined emerging and developed markets to come to this conclusion,” he said, adding that emerging stocks have expected to benefit. Because the cost of risk goes down.
UBS strategist Manik Narain said analysis of cases where policymakers in some developing countries eased monetary policy over the past 20 years, but the Fed did not, usually shows Equities have been shown to benefit.
In the first six months after the start of what Narain called the “early” emerging market easing cycle, when export growth topped 10% year-on-year, equities delivered “historically strong and front-loaded” returns ( 7% on average in local currency). Year.
But historical data shows yields on 10-year benchmarks have fallen by 80 basis points in the six months since emerging central banks began easing, and in total return terms, municipal bonds could appreciate in value. It has been shown that there is According to Narain’s calculation, 8% to 9%. Currencies typically struggle, with spot FX returns averaging -0.7%.
Many emerging currencies, especially those in Latin America, have posted an impressive first half of the year, but are now in the red.
easing wave
The policy shift began in May, when the central bank of Hungary cut the overnight rate from 18% to 17%, the first cut in three years. In July, the rate cut was further reduced by 0 percentage points.
Latin America’s major central banks, which have led the most aggressive tightening in the past two years, are now reducing the level of restraint in monetary policy following clear signs of slowing inflation.
Chile became the first major central bank in the region to cut its rate by 100 basis points in July, following small- and medium-sized Costa Rica and Uruguay. Brazil’s central bank also cut interest rates by 50 basis points, more than expected, bringing the benchmark rate to 13.25%.
Brazil’s 12-month inflation rate fell to 3.19% in mid-July, well below the central bank’s target of 3.25%, and economists expect more significant rate cuts ahead.
“Inflation in each country has fallen sharply at various points in the cycle,” Paul Greer, emerging markets fixed income and currency portfolio manager at Fidelity International, told Reuters.
Colombia and Peru are set to cut rates within the next two months, and Hungary is set to cut rates again, Gurría said. The Czech Republic and Poland may follow suit.
But Gurría added that the list included Israel, South Korea, Malaysia and Indonesia, and that some countries would not cut rates “until the Fed gives the go-ahead against further rate hikes.”
Mexico is also part of the same group. Banco de Mexico’s Jonathan Heath recently said the bank would keep its policy rate unchanged at 11.25%. Heath added that the Fed’s decision was “very relevant” for the Mexican central bank’s board.
When the Fed last raised rates in July, it set the benchmark for overnight rates in the range of 5.25% to 5.50%, leaving open the possibility of another rate hike in September.
Amid growing prospects of global disinflation, Martin Castellano, head of Latin America research at the Institute of International Finance (IIF), expects any divergence between U.S. and emerging market monetary policy measures to be temporary.
“It shouldn’t take long for everyone to be on the same page,” he said.
(Reporting by Jorgelina do Rosario and Karin Strohecker, Editing by Christina Fincher)
