Could Falling US Rates Elevate Emerging-Market Returns?

February 02, 2024
1 min read
Emerging-Market Assets Have Performed Well Following Rate Peaks
Average Investment Growth (USD)
Lines showing emerging-market returns rising following US interest rate peaks since 1995

Past performance does not guarantee future results.
The rate cycle is represented by the Fed fund target rates since 1995. EM equities and EM currency are represented by the MSCI indices, EM debt and EM local-currency debt are represented by JPM indices. Data is re-based to $100 at the peak point for each rate cycle.
As of November 30, 2023
Source: Bloomberg, J.P. Morgan, MSCI and AllianceBernstein (AB)

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.

We think multi-asset investors should take notice.

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. 

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.