Emerging central bank rate hikes will strengthen local debt and weigh on equities


LONDON (Reuters) – Rising interest rates by central banks in developing economies will support emerging market debt and provide a buffer against tightening US Federal Reserve policy, but could cause problems for equities, a BlackRock said on Monday.

“Central banks in the emerging world have raised interest rates to try to contain inflation and keep their currencies from depreciating sharply,” said Wei Li, chief global investment strategist at BlackRock Investment Institute of the top manager assets in the world.

Central banks in developing countries around the world – from Brazil to Russia and South Korea have raised rates in recent months.

The weighted average of emerging market policy rates that are part of JPMorgan’s GBI-EM Diversified Global Index now stands at 3.2% and is expected to reach just under 5% in a year. This compares to near zero or negative rates in the United States and the eurozone, BlackRock calculated, adding that it shows that much of the work is being done in emerging markets.

However, the proactive approach of emerging central banks was also putting pressure on growth, already affected by the delay in vaccine deployment, BlackRock said.

“This made us cautious about EM stocks, but made some EM debt more attractive in a underperforming world.”

Among emerging market fixed income securities, local currency debt offered the best opportunities due to its short duration and sensitivity to rising rates, BlackRock said.

“This gives exposure to regions that make up a small portion of emerging market stock indices, like Latin America,” he said.

“We prefer local currency bonds from high yielding countries with strong current account balances,” said Wei Li, adding that the asset manager is also overweighting Chinese government bonds for their high yields.

(Reporting by Karin Strohecker; Editing by Mark Potter)


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