Emerging market assets perform well in an environment of rising inflation and strong growth, even when yields are going up and developed market economies are outperforming.
After emerging markets’ strong run over the past year, two big worries confront investors. First, the likelihood that over the next six quarters or so emerging economies look set to underperform their developed counterparts – a rare development in recent history. And second, that US Treasury yields seem poised to rise, a factor that can unsettle markets more generally.
Normally either of these factors might suggest that emerging markets’ (EM) fortunes are likely to turn. But not now. That’s because the economic environment looks set to stay very favourable for EM assets. And if history is a guide, EM equities and bonds should continue to perform exceptionally well.
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