Markets globally gave back part of their early-year gains as the macro story turned more challenging. Upside surprises to both inflation and growth in the U.S. and Europe led to a sharply higher repricing in U.S. rates as well as renewed uncertainty around the Federal Reserve’s path.

While many of the factors favoring emerging markets (“EM”) remain in place (compelling valuations, light positioning, and high carry), the asset class is likely to struggle without greater visibility on U.S. rates. This dynamic was a main takeaway from the latest debate among The Rohatyn Group’s (“TRG”) macro analysts and portfolio managers about recent developments and future trends in stocks, bonds, and currencies.

1. Growth 

The global growth picture continues to improve with
signs of momentum favoring EM, as suggested by
the EM-led jump in February Purchasing Managers’
Indexes (“PMIs”) and economic surprise indices.
China’s rapid normalization remains a bright spot
with its February manufacturing PMI moving to
expansionary territory for the first time in half a year.
While growth remains tilted in favor of EM (relative to
industrialized countries), the major development of
late is remarkable resilience in U.S. activity, including
surprisingly strong hiring figures, spending, and green
shoots in interest-rate sensitive housing. As such, U.S.
strength raised fears that the economy may not slow
enough for inflation to subside. So far the recovery
in China failed to generate a broad-based boost to
EM: for example, the consumption-led rebound is
benefiting strategies with exposure to tourism and
trade (mainly in Asia), with more limited impact
on commodities.

2. Monetary Policy 

The GSM debate focused on the implications of
renewed uncertainty about the path for U.S. rates,
which represents a headwind to assets across the
EM spectrum. Prospects for persistent disinflation,
economic slowdown in developed markets, and
the perception that the U.S. Federal Reserve (“Fed”)
tightening was near its end contributed to the rally in
risky assets from October through January. However,
this narrative was challenged by recent signs of growth
resilience and stickier inflation, resulting in higher U.S.
rates, a stronger dollar, and choppier markets. The
internal consensus singled a potential increase in the
pace of interest rate hikes (to half-point increments) by
the Fed as the main market risk going forward – this is
the case even after markets already priced in a higher
terminal rate and no cuts in 2023. By contrast, a “soft
landing” scenario of gradual quarter-point hikes would
encourage renewed risk-taking in EM. The critical
debate about the pace of rates hikes will be resolved
in the March 22nd Federal Open Market Committee
(“FOMC”) decision.

3. Differentiation 

The EM complex – currencies, credit spreads, and
equities – held up relatively well in recent weeks
considering the sharp jump in U.S. interest rates and
volatility. TRG participants argued the combination of

compelling valuations and light positioning,
among other factors, likely contributed to the relative
resilience. Differentiation remains an important
trend: on the equity front, for example, countries with
close links to China’s reopening (Korea, Taiwan) are
outperforming so far this year, as have some higherquality
credits (Mexico) and sectors with depressed
valuations (Greek banks). TRG colleagues believe that
a defensive approach towards EM risk exposure is
warranted given additional uncertainty, particularly
around upcoming Fed moves and the implications for
the dollar. Even strategies that have outperformed
such as high carry may struggle if U.S. rates keep
grinding higher as they may prevent EM central
banks from cutting rates, which would ultimately
undermine fundamentals.

4. Idiosyncratic drivers 

TRG participants argued that idiosyncratic drivers
of EM performance will likely come to the fore when
expectations for the Fed’s terminal rate finally stabilize
(something that could occur as early as March 22nd) –
a pivot from the current global macro-risk dominated
trading environment. Areas of potential opportunity
include countries facing restructurings such as Sri
Lanka, where an International Monetary Fund deal
is moving closer after receiving support from China.
Egypt is also undergoing a rebalancing aimed at
restoring macro stability, and several countries will face
general elections – with important implications for the
future policy direction – including Argentina, Pakistan,
Thailand, and Turkey. Chile, meanwhile, will attempt
to rewrite its constitution again. TRG analysts argued
the consequences of domestic policy decisions are
becoming more relevant given the environment of high
interest rates and weaker fundamentals in some cases.


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Exposure to emerging markets generally entails greater risks and higher volatility than exposure to well-developed markets, including significant legal, economic and political risks. The prices of emerging market exchange rates, securities and other assets are often highly volatile and movements in such prices are influenced by, among other things, interest rates, changing market supply and demand, external market forces (particularly in relation to major trading partners), trade, fiscal and monetary programs, policies of governments and international political and economic events and policies. All investments entail risks, including possible loss of principal. Past performance is not necessarily indicative of future performance.
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