Tue Sep 17 07:00:00 UTC 2024: ## Fed Rate Cut Sparks Hope for Emerging Markets, But Risks Remain

**New York/London** – With the Federal Reserve widely expected to cut interest rates this week, investors are betting that billions of dollars will flow back into emerging markets (EM), which have been hit hard by rising US borrowing costs.

JPMorgan Asset Management, Van Eck Associates Corp., and Vontobel Asset Management are among those predicting a rebound in EM bonds, particularly those denominated in local currencies. They argue that EM central banks will follow the Fed’s lead, leading to a rally in longer-dated bonds.

“Duration will become the target,” said Pierre-Yves Bareau, head of emerging-market debt at JPMorgan Asset Management. “Asia is of interest when we talk about engaging in duration.”

Since the beginning of 2022, EM bond funds have lost $153 billion, as investors sought the safety of US bonds. But with borrowing costs declining, improved risk appetite could draw money back into EM assets, according to Gramercy Funds Management.

JPMorgan Chase & Co. is recommending an overweight position in EM local-currency debt, citing strong growth in the developing world. However, the outlook for EM currencies is less clear.

Barclays strategists warn that easing central bank policies could erode carry trades, and a potential US recession could trigger a flight to safety and boost the dollar, impacting currencies in Colombia, Hungary, Mexico, and South Africa.

Analysts are divided on regional prospects. Grant Webster, who oversees emerging-market sovereigns and currencies at Ninety One, favors debt from eastern European countries with strong credit metrics, such as Poland and Hungary, which are closely watching the Fed’s moves.

Meanwhile, JPMorgan’s Bareau is bullish on South Africa, where political uncertainty has diminished following a surprise election result in May.

In Asia, the Bank of Japan’s recent interest rate hike has triggered an unwinding of carry trades, harming many emerging markets. However, the yen’s appreciation is expected to boost Asian currencies, particularly the Korean won, according to Thierry Larose of Vontobel Asset Management.

Latin America faces headwinds due to policy uncertainty in its two largest economies, Mexico and Brazil. The region’s central banks have already aggressively eased policy, leaving little room for further cuts.

David Austerweil, an emerging-markets money manager at Van Eck, points to potential profits from market rates rallying along yield curves. However, Brazil is preparing to hike rates in response to President Luiz Inacio Lula da Silva’s ambitious spending plans.

While some investors are optimistic about a post-Fed rate cut rally in emerging markets, many are waiting for the US election results in November before making significant allocation decisions.

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