Could Falling US Rates Elevate Emerging-Market Returns?

Emerging-market (EM) assets were resilient in 2023, gaining ground despite conflict in the Middle East, concerns over slowing economic growth in China, and the US dollar’s strength against other regional currencies. Now, with the Fed signaling rate cuts in 2024, the news could get better. Over the past three decades, EM assets have rallied in the months following US rate peaks.

What’s behind the strong showing? Historically, lower US interest rates have often strengthened EM regional currencies against the US dollar. This has provided support for EM risk assets such as equities, although the easing trend is underway in EM as well. Dollar-denominated EM bonds can also benefit. That’s because these bonds typically offer a yield advantage relative to US Treasuries, which can grow as US yields retreat.

These trends could foster supportive technical conditions as well. If the Fed cuts rates and the US dollar weakens, we would expect to see renewed capital flows into EM this year. Keep in mind, too, that EM economies have outgrown their developed-market counterparts over the past 20 years—a trend we expect to continue.

There’s reason for optimism about EM prospects, but investors could be in for a bumpy ride along the way. That’s why we believe it makes sense to take an active approach within a multi-asset strategy that incorporates a diversified range of assets. We don’t know if history will repeat itself, but with rates at or near their peak, this might be an opportune time to give EM assets a closer look.