Why Emerging Markets are Rallying

Emerging markets had a rude shock in 2013 when the US Federal Reserve indicated that it was preparing to slow the rate at which it was pumping money into the global economy

J.P. Morgan Asset Management 9 October, 2014 | 3:57PM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, JP Morgan Global Market Strategist, Kerry Craig assesses the prospects, opportunities and risks of emerging markets.

Current accounts, currencies and central banks can go a long way to explaining the underperformance in emerging market equities since 2011—and also their recent rise. Countries that had managed to get by with high inflation and relatively weak fundamentals in an era of cheap global liquidity had a rude shock in 2013 when the US Federal Reserve indicated that it was preparing to slow the rate at which it was pumping money into the global economy. The countries that were most dependent on foreign funding to finance their current account deficits were hit hardest, as they experienced a plunge in their foreign reserves and were forced to raise interest rates to halt the decline in their currencies.

Since 2013, many countries have seen a striking improvement in their macroeconomic situation, particularly those with more proactive central banks. Aggressive monetary policy action and multiple interest rate increases have pushed up real rates, helping to stabilise currencies and foreign exchange reserves have been rebuilt. Meanwhile, current account deficits have narrowed, and many central banks are now starting to either loosen monetary policy or at least stop raising interest rates. This should allow for greater levels of credit expansion and higher levels of economic growth in the future.

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About Author

J.P. Morgan Asset Management  is the investment arm of JPMorgan Chase & Co. and it is one of the largest active asset managers in the world.