Emerging Markets and the Fed — What’s Attractive and What to Avoid

September 16th Weekly Market Update

While the Federal Reserve (Fed) could surprise investors this week, the Fed has been careful to communicate its intentions to the markets ahead of this week’s meeting. Most market participants expect the Fed to announce a tapering in the monthly pace of its bond-buying program coupled with more guidance on when, in the distant future, it may raise rates.

Nowhere have the effects of the Fed’s message on tapering been felt more acutely than in the world’s emerging markets (EM). The Fed’s taper talk has put emerging markets under pressure. The MSCI Emerging Market Equity Index is down 4% for the year compared with a 20% gain for U.S. stocks based on the S&P 500. Much of that decline came following the Fed’s May 22 communication on its intention to taper, with EM stocks falling about 15% over the following month. In addition, most EM currencies are depreciating as investors are pulling their money. The values of the currencies of Brazil, India, and Indonesia have fallen by about 10% over the past three months, echoing the start of the currency crises in Mexico in 1994 and Asia in 1997, which were devastating to emerging markets investors.

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