While many are predicting that emerging markets may well be on the rise this year, new research has suggested that a new taper tantrum, reminiscent of the 2013 incident, might well scupper investors' plans.
As US Treasury yields have been rising in the last six months, some are seeing parallels to the notorious 2013 incident that damaged emerging market assets. Gaurav Saroliya, director of macro research at Oxford Economics said, “for bond markets the chief risk is that the Fed gives rise to a policy accident by fanning taper talk just at the time when bond issuance is likely to increase further.”
He added: “Most fixed income will be under pressure in such a scenario, including emerging market local bonds, which will be additionally challenged by the fact that a back-up in US real yields would be a short-term prod for the dollar.”
However, Mr Saroliya’s view is hardly consensus. Guneet Dhingra, an analyst at Morgan Stanley said a gradual rise, particularly in real yields, may mitigate the risk of another taper tantrum in 2021.
“One reason why yields rose sharply in the so-called taper tantrum of 2013 was that they were too low relative to improving economic fundamentals. A gradual rise in yields ensures that they don't lag too far behind fundamentals and reduces the chances of a sharp move higher. Fed communications, starting with the January FOMC meeting, will be paramount in ensuring that the real yield move does not get out of hand,” said Mr Dhingra.
Some are even bullish on emerging markets which seems to be the view coming from asset managers. Graham Smith, a market commentator at Fidelity International, points to the strong gains in Brazil, China and India in the last three months which he suggests signals that a significant shift is ‘already underway’.
However, for Oxford Economics' Mr Saroliya, he views that there are some real risks to the above scenarios. The first and probably most serious issue is the possibility of declining policy support provided by the Federal Reserve last year.
The reasoning for this is due to the availability and roll-out of COVID vaccines. However he said that this makes the outlook for 2021 “overwhelmingly reliant on the success in taming COVID-19”. Another connected risk is the outbreak of new variants of Covid-19 which raises concerns about vaccine efficacy.
However, while there are always risks in global financial markets its worth remembering the IMF – which most recently issued its growth forecasts for 2021 before the vaccine rollout and prior to America’s election “blue sweep” – sees growth in emerging markets of about 6 percent this year, compared with 3.9 percent for developed economies.
The bulking up of emerging market teams in asset managers of various sizes seems to suggest that the smart money is on continued success in this oft out of favour asset class.
