Emerging markets still haunted by the Fed
With the genie of tapering out of the bottle, the Fed will haunt emerging markets for some time, despite the rally across asset classes
A year ago, when the United States Federal Reserve signalled its intention to start withdrawing its huge monetary stimulus, emerging markets sold off sharply and indiscriminately.
Now, as the Fed continues to scale back, or taper, its asset purchases, the shift towards tighter US monetary policy appears to be having little effect on emerging market assets.
Investor sentiment towards developing economies has been remarkably bullish over the past four months. Even the last bout of nervousness in January had more to do with issues specific to these markets rather than fears about the Fed.
The emerging markets rally lacks conviction and could easily go into reverse
The facts speak for themselves: the average spread on emerging market dollar-denominated bonds - which stands at 285 basis points, or 2.85 percentage points - is now more or less at the same level as in early May last year, just before the Fed let the "tapering" genie out of the bottle.
The average yield on local currency debt - which is riskier given the vulnerability of many emerging market currencies - has fallen to 6.5 per cent from nearly 7.2 per cent in January.
Equities have risen 5.1 per cent over the past three months, with the stock markets of Russia and Turkey rising 9 per cent and 11.4 per cent, respectively.
Sentiment-wise, one could be forgiven for forgetting that several vulnerable emerging markets had ever been dubbed the "Fragile Five". The currencies of three members of this group - Turkey, India and Indonesia - have risen 8 per cent, 4.7 per cent and 3 per cent, respectively, against the US dollar since the end of January.