Is Fed's gift enough to cheer EMs?

Emerging markets bore the brunt of the global monetary policy tightening cycle that led to steep fund outflows. Foreign investors turned their backs on EMs as elevated interest rates amid subdued global growth outlook made safe-haven assets such as the US dollar more lucrative.

- Harsha Jethmalani

A look at Bloomberg Emerging Markets Capital Flow Proxy Index mirrors this pain, with the reading remaining below the long-term average of 145 in calendar year 2023. But the tide may now turn in favour of emerging markets. The US Federal Reserve’s latest dovish stance signals three interest rate cuts in 2024. If that materialises, it would be manna from heaven for emerging markets.

In fact, as per the December Global Fund Manager survey by BoFA Securities, allocation to emerging market equities was up by 5 percentage points month-on-month to net 1% overweight, reversing the sharp 38 percentage point decline of the prior three months. While the current allocation is still below the long-term average, per the Bofa report, it nonetheless is a change of mood.