Emerging Markets Flourish as Hopes for Fed Rates Hike Withers

According to a Bloomberg report, “Emerging market investing sentiment may have ebbed a bit, but allocation to emerging market stocks is now at 13%, the highest level since September 2014, according to a Bank of America Merrill Lynch fund manager survey. Harvard University’s Endowment kept a small emerging market stock-investing team, even as it cut most of the equity market experts on its trading desk in favour of external money managers”.

Mexico and Brazil were listed among the emerging markets top gainers as investors appeared to have turned their focus to emerging markets after the Federal Reserve failed to raise market participants’ hopes for a rate hike in September. The Brazilian Bovespa edged 1.5% higher on August 15, there was also a 0.68% growth in the Mexican Index IPC. With carry trades on the rise, a leap is anticipated for foreign fund flows to most of the emerging markets. The current spate of low interest rates in most developed countries has facilitated investor borrowing from developed economies and investing them in the high risk with high return emerging markets.

Voice of America reports that, “Over the weekend, Venezuela reopened its border with Colombia, allowing thousands of its citizens to buy food and other products in short supply.”

In all emerging market funds that climbed higher on Tuesday, the iShares MSCI Colombia Capped ETF grew by 2.3% after the country dropped monthly retail sales and industrial production numbers.  With the Brent oil price 4.6% higher to the recent $49.10 per barrel, the iShares MSCI Qatar Capped ETF (QAT) was up 1.6% and the United States Oil Fund (USO) was up 1.5%, but the iShares MSCI UAE Capped ETF (UAE) fell 1.8% and the iShares MSCI Saudi Arabia Capped ETF (KSA) fell 1.6%. Russia Delayed oil-producer Bashneft’s share sale, which is part of an ambitious privatization scheme.

The assets of emerging markets are largely sensitive to Fed rate hikes as higher interest rates in the US will mostly boost the US Dollar and weigh heavily on the price of commodities. This reaction is also likely to be eliminated at the next Fed rate increase. The Feds are however expected to raise the interest rates in December, once this year and to move cautiously in light of the current imbalance of the US economic recovery, which can be seen in the global growth uncertainties and the weak retail sales data that dropped last week

The US jobs data is encouraging, the Feds have previously failed to hint at an intension to tighten policies, but the still persisting inflationary pressures remain in moderation. Many analysts still see signs that unemployment rate in the US may slide lower and still fail to trigger a visible change in the level of inflation. The Feds might not be too eager to raise rates anytime soon as they currently do not feel the immediate need for a rates hike, this is similar to the current disposition of the Bank of England after the Governor Mark Carney implied last week that the BoE may tolerate a period of above average inflation levels.