Capital Economics: History Says Rally in Emerging Market Stocks is no Dead Cat Bounce (FE Trustnet)

John Higgins, the chief markets economist of London based Capital Economics, was quoted by FE Trustnet as saying the recent spike in emerging market stocks is set to continue and concerns over tighter US monetary policy have been massively over-done:

“Admittedly, the prospects for growth in emerging markets and Fed policy continue to be seen by many as reasons for caution. But while growth has clearly slowed, the big deceleration in the BRICs has probably already happened… And if history is a useful guide, a rout is by no means a foregone conclusion once US rates begin to rise… What’s more, equity valuations are generally lower in emerging markets than in developed markets. Granted, volatility remains low despite plenty of potentially destabilising events. But we suspect that if these began to have more of an impact, any correction would only be temporary.”

He went on to explain:

“There have been three major Fed tightening cycles in the past quarter of a century. The return from emerging market equities in the 12 months after the initial was very poor, in US dollar terms, in the first case. But in the other two, it was very healthy.”

The first case was in 1994 when former Fed chairman Alan Greenspan spooked the market by unexpectedly rising interest rates while the other two tightening cycles were in 1999 and 2004 with emerging markets funds delivered double digit returns in each of those years.

To read the whole article, Why you can afford to buy emerging markets funds again, go to the website of FE Trustnet.

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