Once the darling of investors, emerging markets have this year seen growth slip to lows not seen since the peak of the financial crisis and after much volatility across assets in the sector, they are not likely to return to favor any time soon.
As the U.S. is widely expected to raise interest rates for the first time in nearly a decade later this month, analysts are now trying to assess the fallout for EM, with the Bank of International Settlements (BIS) warning of further pain for the sector in 2016 that could exceed what was seen during the 2013 “taper tantrum”.
Following Friday’s expectation-beating jobs report, which showed the U.S. economy generated 211,000 jobs in November, markets have priced in around an 80 percent chance of a rate increase when the Federal Open Market Committee (FOMC) meets later this month.
“Weaker financial market conditions combined with an increased sensitivity to U.S. rates may heighten the risk of negative spill overs to emerging market economies (EMEs) when U.S. policy is normalized,” the Switzerland-based BIS, which acts as a bank for central banks said in its quarterly review, published on Sunday.
The BIS said that changes in the yield spreads on an emerging market economy (EME) bond index compared to the U.S. 10-year Treasury note actually point to greater risks for the sector now than in 2013, when bond yields shot higher after the Fed spooked markets by hinting that a tightening of U.S. monetary policy was about to take place. Bond prices and yields move in opposite directions.