Beyond the short-term volatility associated with the trade fears, many are wary of the diverging monetary policies between emerging central banks and the Federal Reserve, which is expected to hike interest rates two more times this year. While central banks in developing countries could also respond with their own rate hikes, the higher interest rates would stifle growth.
The International Monetary Fund calculates that due to U.S. rate hikes, bond sales this year and next year could reduce inflows into emerging markets by about $70 billion, compared to the $260 billion flowed into those economies since 2010 as a result of the Fed’s previous loosening policies.
Nevertheless, there are some that argue the recent selling may be overdone.
Related: Small Caps Are Trending in Emerging Markets Too
“We don’t think this is an accurate pricing of emerging-market fundamentals,” Mark Baker, an investment manager at Aberdeen Standard Investments, told the WSJ. “It’s not like 2013 when big countries were running current-account deficits. There’s not much inflation about.”
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