Following a hugely volatile summer, emerging markets rebounded in September. Is the comeback sustainable?
Emerging market (EM) assets have been selling off this year as a stronger US dollar and higher US rates made external funding more expensive; outflows from EM funds also added to the sell-off. But September saw a rebound, and even the most affected markets such as Turkey and Argentina regained ground after policymakers took remedial action. Also, investors saw value in EM assets, especially those with a high credit rating, and inflows resumed. So is the tide really turning for the EMs? Or is this just a temporary improvement, and will renewed US dollar strength or another jump in US rates erase it?
One-day corrections of 3% are always painful, especially so when investors have become so accustomed to low volatility after almost a decade-long bull market. We see the move as most likely a technical sell-off (famous last words) and believe it is probably too early to buy the dip.